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Point 1: Teal Mountain Inc. has been manufacturing its own finials for its curtain rods. The company is currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $4 and $5, respectively. Normal production is 26,000 curtain rods per year.
Point 2: A supplier offers to make a pair of finials at a price of $13.25 per unit. If Teal Mountain accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $46,900 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products.
Question 1: Prepare the incremental analysis for the decision to make or buy the finials. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
Question 2: Should Teal Mountain buy the finials?
Question 3: Would your answer be different in (b) if the productive capacity released by not making the finials could be used to produce income of $37,300?
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