Chop 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 70%of direct labor cost. The direct materials and direct labor cost per unit to make the lamp shades are $6.00 and $7.00 respectively. Normal production is 29,000 table lamps per year. A supplier offers to make the lamp shades at a price of $18.20 per unit. If Chop Inc. accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $45,000 of fixed manufacturing overhead currently being charged to the lamp shades will have to be absorbed by other products.
- Prepare the incremental analysis to make or buy the lamp
- Should Chop Inc. buy the lamp shades?
- Would your answer be different in (2) if the shades are priced at 17.5 instead of 18.20?