1. Make or Buy

Uptown Furniture Company has been manufacturing its own furniture. The company is currently operating at 100% 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 a study chair are RM80.00 and RM90.00, respectively. Normal production is 50,000 chairs per year.

A supplier offers to make the chair at a price of RM200 each. If the furniture company accepts this offer, all variable manufacturing costs will be eliminated, but the RM30,000 of fixed manufacturing overhead currently being charged to the chairs will have to be absorbed by other products.

Instructions

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

(b) Should Uptown Furniture Company buy the chairs from the outside supplier? Justify and discuss your answer