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E7-5 Schopp Inc. has been manufacturing

Price: $1.99

Schopp 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 $4 and $5, respectively. Normal
production is 30,000 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.

(a) Prepare the incremental analysis for the decision to make or buy the lamp shades.
(b) Should Schopp Inc. buy the lamp shades?
(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?

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