Shannon Inc. has been manufacturing its own shades for its table lamps. The comp

Question

Shannon Inc. has been manufacturing its own shades for its table lamps. The company is currently operating at 100% of capacity. Variable manufacturing overhead is charged to production at the rate of 52% of direct labor cost. The direct materials and direct labor cost per unit to make the lamp shades are $3.97 and $5.98, respectively. Normal production is 38,700 table lamps per year.

A supplier offers to make the lamp shades at a price of $13.51 per unit. If Shannon Inc. accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $37,539 of fixed manufacturing overhead currently being charged to the lamp shades will have to be absorbed by other products.

Complete the incremental analysis for the decision to make or buy the lamp shades. (If an amount is blank enter 0, all boxes must be filled to be correct. If the impact on net income is a decrease use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45). Round answers to 0 decimal places, e.g. 2,510.)

Make Buy Net Income(Decrease)
Increase
(Decrease)
Direct materials
Direct labor
Variable manufacturing costs
Fixed manufacturing costs
Purchase price
Total annual cost

Explanation / Answer

Make

Buy

Net Income increase(decrease)

DM

153,639

0

153,639

DL

231,426

0

231,426

Variable MOH

120,342

0

120,342

Fixed MOH

37,539

37,539

0

Purchase price

0

522,837

(522,837)

Total annual cost

542,946

560,376

(17,430)

Make

Buy

Net Income increase(decrease)

DM

153,639

0

153,639

DL

231,426

0

231,426

Variable MOH

120,342

0

120,342

Fixed MOH

37,539

37,539

0

Purchase price

0

522,837

(522,837)

Total annual cost

542,946

560,376

(17,430)

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