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 53% of direct labor cost. The direct materials and direct labor cost per unit to make the lamp shades are $4.01 and $6.03, respectively. Normal production is 37,800 table lamps per year.
A supplier offers to make the lamp shades at a price of $13.54 per unit. If Shannon Inc. accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $37,800 of fixed manufacturing overhead currently being charged to the lamp shades will have to be absorbed by other products.
Instructions

Prepare the incremental analysis for the decision to make or buy the lamp shades. (If an amount should be blank, enter a zero. All boxes must be filled to be correct. If amount decreases net income, use either a negative sign preceding the number eg -45 or parentheses eg (45).)


net income
make buy increase (decrease)
direct materials
direct labor
variable manufacturing costs
fixed manufacturing costs
purchase price
total annual cost

Explanation / Answer

Make Buy Incremental Cost Price 511812 -511812 Direct Material 151578 0 151578 Direct Labor 227934 0 227934 Manufacturung Overhead 120805.02 0 120805.02 Fixed Manufacturung OverHead 37800 37800 0 Total Annual Cost 538117.02 549612 -11494.98 This analysis shows that , the company will incur an addition of $11,494 by buying.Hence, it is better to manufacture the product. Make Buy Incremental Cost Price 511812 -511812 Direct Material 151578 0 151578 Direct Labor 227934 0 227934 Manufacturung Overhead 120805.02 0 120805.02 Fixed Manufacturung OverHead 37800 37800 0 Total Annual Cost 538117.02 549612 -11494.98

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