Reference no: EM132566623

Schopp Inc. has been manufacturing its own shades for its table lamps. The company is currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 70% of direct labor cost. The direct materials and direct labor cost per unit to make the lamp shades are $4.00 and $5.00 respectively. Normal production is 30,000 table lamps per year. A supplier offers to make the lamp shades at a price of $12.75 per unit. If Schopp Inc. accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $45,000 of fixed manufacturing overhead currently being charged to the lamp shades will have to be absorbed by other products. Instructions:

Question (a) Prepare the incremental analysis for the decision to make or buy the lamp shades.

                                               Make              Buy Net Income Increase (Decrease)

Direct materials (30,000 × $4.00)       $120,000            $0

Direct labor (30,000 × $5.00)           150,000                   0

Variable manufacturing costs (150,000 × 70%) 105,000          0

Fixed manufacturing costs                45,000                    45,000

Purchase price (30,000 × $12.75)          0                           382,500

Total annual cost                               $420,000                  $427,500