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Incremental Analysis: Make vs. Buy Lamp Shades

Schopp Inc. currently manufactures its own lamp shades for its table lamps at full production capacity. It costs $3.93 per unit for direct materials and $4.90 per unit for direct labor to make the shades. Total annual production is 28,100 lamps. A supplier is offering to make the shades for $13.20 per unit, which would eliminate variable manufacturing costs but leave Schopp with $42,690 in unused fixed overhead costs to absorb elsewhere.

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Yousaf Bhutta
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40 views2 pages

Incremental Analysis: Make vs. Buy Lamp Shades

Schopp Inc. currently manufactures its own lamp shades for its table lamps at full production capacity. It costs $3.93 per unit for direct materials and $4.90 per unit for direct labor to make the shades. Total annual production is 28,100 lamps. A supplier is offering to make the shades for $13.20 per unit, which would eliminate variable manufacturing costs but leave Schopp with $42,690 in unused fixed overhead costs to absorb elsewhere.

Uploaded by

Yousaf Bhutta
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

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 60% of direct labor cost. The direct materials and direct labor cost per unit to make
the lamp shades are $3.93 and $4.90, respectively. Normal production is 28,100 table lamps per
year.
A supplier offers to make the lamp shades at a price of $13.20 per unit. If Schopp Inc. accepts
the suppliers offer, all variable manufacturing costs will be eliminated, but the $42,690 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).)
Make

Net Income
Increase (Decrease)

Buy

Direct materials

110433

Direct labor

137690

Variable overhead costs

82614

Fixed manufacturing costs

42,690

42,690

Purchase price

370920

Total annual cost

373,427

LINK TO TEXT

Should Schopp Inc. buy the lamp shades?


NO

LINK TO TEXT

$
110433

137690

82614

$
413,610

-370920

$
-40183

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 $55,453?
, income would

by $
15,270

The above button option are not showing me. I dont have idea about it.

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