Schopp Inc. has been manufacturing its own shades for its table lamps. The compa

Question

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 50% of direct labor cost. The direct materials and direct labor cost per unit to make the lamp shades are $3.93 and $4.70, respectively. Normal production is 28,000 table lamps per year.
   A supplier offers to make the lamp shades at a price of $13.10 per unit. If Schopp Inc. accepts the supplier%u2019s offer, all variable manufacturing costs will be eliminated, but the $43,570 of fixed manufacturing overhead currently being charged to the lamp shades will have to be absorbed by other products.
Prepare the incremental analysis for the decision to make or buy the lamp shades. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
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 50% of direct labor cost. The direct materials and direct labor cost per unit to make the lamp shades are $3.93 and $4.70, respectively. Normal production is 28,000 table lamps per year.
   A supplier offers to make the lamp shades at a price of $13.10 per unit. If Schopp Inc. accepts the supplier%u2019s offer, all variable manufacturing costs will be eliminated, but the $43,570 of fixed manufacturing overhead currently being charged to the lamp shades will have to be absorbed by other products.
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 50% of direct labor cost. The direct materials and direct labor cost per unit to make the lamp shades are $3.93 and $4.70, respectively. Normal production is 28,000 table lamps per year.
   A supplier offers to make the lamp shades at a price of $13.10 per unit. If Schopp Inc. accepts the supplier%u2019s offer, all variable manufacturing costs will be eliminated, but the $43,570 of fixed manufacturing overhead currently being charged to the lamp shades will have to be absorbed by other products.

Explanation / Answer

We will calculate the cost of making the lamp shades:
Here we will consider all the relevant costs. In this case the relevant costs are variable costs and hence we will not consider fixed costs:
=Material cost+ Labor cost+ Overheads
=5+6+70%*6
=$15.2 per unit
This is less than cost of buying, Hence the Company should manufacture the lamps

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