ACCOUNTING Schopp Inc. has been manufacturing its own shades for its table lamps
ID: 2448858 • Letter: A
Question
ACCOUNTING
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 $3.96 and $5.00, respectively. Normal production is 27,600 table lamps per year.
A supplier offers to make the lamp shades at a price of $13.00 per unit. If Schopp Inc. accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $46,120 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
Make Buy Net Income Increase (Decrease)
Would your answer be any different in (b) if the productive capacity released by not making the lampshades could be used to produce income of $41,500 ?
Explanation / Answer
Since cost is increasing considering buy option in place of make option, buy option should be executed
(b) in case production capacity of lampshades is released, we can earn additional income of $ 41,500. Considering additional cost over make option & additional income, we have net gain of $ 12,796 (41,500 - 28,704). Hence production facility needs to be released.
Particulars Make Buy Net Income Increases / (Decrease) Direct Material 1,09,296 1,09,296 Direct Labor 1,38,000 1,38,000 Variable Overhead Cost 82,800 82,800 Fixed Manufacturing Costs 46,120 46,120 - Purchase Price 3,58,800 -3,58,800 Total Annual Cost 3,76,216 4,04,920 -28,704Related Questions
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