Muscat Inc. has been manufacturing its own Camera for its Mobile Phone. The company is currently operating at 100% of capacity. Variable manufacturing overhead cost is R.O. 3 per unit. The direct materials and direct labor cost per unit to make the Camera are R.O. 4 and R.O. 6, respectively. Normal production is 50,000 Mobile Phone per year.

A supplier offers to make the Cameras at a price of R.O. 13.50 per unit. If Muscat accepts the suppliers offer; all variable manufacturing costs will be eliminated, but the R.O. 50,000 of fixed manufacturing overhead currently being charged to the Cameras will have to be absorbed by other products.

Instructions

a. Prepare the incremental analysis for the decision to make or buy the Camera.

b. Should Muscat buy the Camera?

c. Would your answer be different in (b) if the productive capacity released by not making the

Cameras could be used to produce income of R.O. 40,000? Briefly explain your answer in your own words.