Young Mi 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 50% of direct labour costs. The direct materials and direct labour costs 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 Young Mi Inc. 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 Young Mi Inc. buy the lampshades?
(c) Would your answer be different in part (b) if the productive capacity released by not making the lampshades could be used to produce income of $40,000?