Course: ACC217
Date: 9/18/2015
E7-5 – Use incremental analysis for make-or-buy decision
Managerial Accounting, 6th Edition, by Weygandt, Kieso, and Kimmel
Primer on Using Microsoft Excel in Accounting by Rex A Schildhouse
Exercise E7-5 Schopp Inc. has been manufacturing its own shades for its table lamps. The company is currently
100% of capacity, and variable manufacturing overhead is charged to production at operating at the rate of
70%
of direct labor cost. The direct materials and direct labor cost per unit to make the lamp
$4.00
and
$5.00
30,000 shades are respectively. Normal production is table lamps per year.
A supplier offers to make the lamp shades at a price of
$12.75
per unit. If Schopp 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.
Instructions:
(a) Prepare the incremental analysis for the decision to make or buy the lamp shades.

Direct materials (30,000 × $4.00)
Direct labor (30,000 × $5.00)
Variable manufacturing costs (150,000 × 70%)
Fixed manufacturing costs
Purchase price (30,000 × $12.75)
Total annual cost
(b) Should Schopp Inc. buy the lamp shades?
No, it's actually cheaper to make them, by $7,500.

Make
$120,000
150,000
105,000
45,000
0
$420,000

Buy
$0
0
0
45,000
382,500
$427,500

Net Income
Increase
(Decrease)
$120,000
150,000
105,000
0
(382,500)
($7,500)

(c) 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
$25,000 ?
Yes, at that point additional production will produce $17,500 more in income and revenue. If this were the case, it would definitely be worth it to buy the products rather than make them.

Total