E7-5 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
(a) Prepare the incremental analysis for the
decision to make or buy the lamp shades.
(b) Should Schopp Inc. buy the lamp shades?
(c) Would your answer be different in (b) if the
productive capacity released by not making the lamp shades could be used to
produce income of $25,000 ?
TUTORIAL
PREVIEW
(a) Prepare the incremental analysis for the decision
to make or buy the lamp shades.
|
Net Income
Increase (Decrease) |
||||
|
Make
|
Buy
|
|||
|
Direct materials
(30,000 x $4.00)
|
$120,000
|
$0
|
$120,000
|
|
|
Direct labor (30,000 x
$5.00)
|
150,000
|
0
|
$150,000
|
|
File name: E7-5 Schopp Inc.xls File type: .xls PRICE: $5
