Should Lamps International Make or Buy Lamps?
What Should Lamps International Do - Continue to Make the Lamps or Buy the Lamps?
Red Lamp has offered to sell 1000 lamps to Lamps International for $48 each. Should Lamps International make the lamps internally or purchase them from Red Lamp?
Answer:
When faced with the decision of whether to continue making lamps internally or buy them from an external supplier like Red Lamp, Lamps International should analyze the costs associated with both options.
Cost Analysis:
Lamps International's Internal Production:
- Direct materials cost: $10 per lamp
- Direct labor cost: $8 per lamp
- Overhead costs: $5 per lamp
- Supervisor salary: $5,000 (for overseeing the production of 1000 lamps)
The total cost of making 1000 lamps internally for Lamps International can be calculated as follows:
Total Cost = (Direct materials cost + Direct labor cost + Overhead costs) * Number of lamps + Supervisor salary
Total Cost = (($10 + $8 + $5) * 1000) + $5,000
Total Cost = ($23 * 1000) + $5,000
Total Cost = $23,000 + $5,000
Total Cost = $28,000
Red Lamp's Offer:
Total Cost of buying 1000 lamps from Red Lamp = Price per lamp ($48) * Number of lamps
Total Cost of buying from Red Lamp = $48 * 1000
Total Cost of buying from Red Lamp = $48,000
Comparing the costs, we find that the cost of making the lamps internally is $28,000, while the cost of buying the lamps from Red Lamp is $48,000. Based on this cost analysis, it would be more cost-effective for Lamps International to continue making the lamps internally rather than purchasing them from Red Lamp.