Maningly Inc. has been manufacturing its own lampshades for its table lamps. The company is currently operating at 100% of capacity. Variable manufacturing overhead is charged to production at the rate of 50% of direct labor cost. The direct materials and direct labor cost per unit to make the lampshades are $4 and $6, respectively. Normal production is 50,000 table lamps per year.

A supplier offers to make the lampshades at a price of $13.50 per unit. If Maningly accepts the supplier’s offer; all variable manufacturing costs will be eliminated, but the $50,000 of fixed manufacturing overhead currently being charged to the lampshades will have to be absorbed by other products.

Instructions

(a) Prepare the incremental analysis for the decision to make or buy the lampshades.

(b) Should Maningly buy the lampshades?

(c) Would your answer be different in

(b) if the productive capacity released by not making the lampshades could be used to produce income of $40,000?