Schopp Inc. has been manufacturing its own shades for its table lamps. The compa
ID: 2502985 • Letter: S
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 60% of direct labor cost. The direct materials and direct labor cost per unit to make the lamp shades are $3.59 and $4.70, respectively. Normal production is 31,600 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 suppliers offer, all variable manufacturing costs will be eliminated, but the $48,220 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.
Should Schopp Inc. buy the lamp shades?
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 $82,544?
Explanation / Answer
SCENARIO 1
PARTICULARS
AMOUNT [per unit]
AMOUNT
Direct Material
3.59
113444
Direct Labor
4.7
148520
Variable Manufacturing O/H
60% * 4.7 = 2.82
89112
Fixed Manufacturing O/H
48220
TOTAL COST
399296
PARTICULARS
AMOUNT [per unit]
AMOUNT
Purchase Cost
13.1
413960
Fixed Manufacturing O/H
48220
TOTAL COST
462180
Thus, we should produce as we will incur lesser costs.
SCENARIO 2
PARTICULARS
AMOUNT [per unit]
AMOUNT
Direct Material
3.59
113444
Direct Labor
4.7
148520
Variable Manufacturing O/H
60% * 4.7 = 2.82
89112
Fixed Manufacturing O/H
48220
TOTAL COST
399296
PARTICULARS
AMOUNT [per unit]
AMOUNT
Purchase Cost
13.1
413960
Fixed Manufacturing O/H
48220
(-) Income
-82544
TOTAL COST
379636
Thus, we should purchase as this will cause a lower cost.
PARTICULARS
AMOUNT [per unit]
AMOUNT
Direct Material
3.59
113444
Direct Labor
4.7
148520
Variable Manufacturing O/H
60% * 4.7 = 2.82
89112
Fixed Manufacturing O/H
48220
TOTAL COST
399296
PARTICULARS
AMOUNT [per unit]
AMOUNT
Purchase Cost
13.1
413960
Fixed Manufacturing O/H
48220
TOTAL COST
462180
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