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Schopp 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 70% of direct labor cost. The direct materials and direct labor cost per unit to make the lamp shades are $3.90 and $5.60, respectively. Normal production is 38,000 table lamps per year.
A supplier offers to make the lamp shades at a price of $15.36 per unit. If Schopp Inc. accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $38,000 of fixed manufacturing overhead currently being charged to the lamp shades will have to be absorbed by other products.
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