Oldman Inc. has been manufacturing its own lamp shades for its table lamps. The company is currently operating at 100% capacity. The direct materials cost is $ 5 per unit, the direct labour cost is $6 per unit and variable manufacturing costs are 40% of direct labour costs. Total fixed manufacturing costs are $500,000 per year. Normal production is 50,000 lampshades per year.

A supplier offers to make the lampshades at a price of $20 per unit. If Oldman Inc. accepts the offer all variable manufacturing costs would be 100% avoidable and $200,000 of the total fixed manufacturing costs would be unavoidable.

a) Prepare an incremental analysis for the decision to make or buy the lampshades.

b) Should Oldman make or buy the lampshades? What is the $ advantage?

c) Assume that if Oldman decides to buy the lampshades part of the factory space could be used to produce 10,000 other lighting products that would generate a contribution margin $15 per unit. Should Oldman make or buy the lampshades? Show your calculations.