Stone Company Manufactures a Product That Contains a Small Lens

question 119

Essay

Stone Company manufactures a product that contains a small lens.The company has always purchased this lens from a supplier for $17 each.Stone recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers)to begin manufacturing the lens instead of buying it.The company prepared the following per unit cost projections of making the lens,assuming that overhead is allocated to the part at the normal predetermined overhead rate of 75% of direct labor cost:
$\begin{array}{llr} \text {Direct materials } &\$7.82\\ \text { Direct labor } &7.00\\ \text { Overhead (fixed and variable)} &5.25\\ \text { Total } &\$20.07\\\end{array}$

The required volume of output to produce the lenses will not require any incremental fixed overhead.Incremental variable overhead cost is $0.68 per lens.Should Stone Company make or buy the lenses?

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Definitions:

Goodwill

An intangible asset that represents the premium paid above the fair market value of the net identifiable assets of an acquired company.

Copyright

An exclusive right to publish and sell a literary, artistic, or musical composition.

Patent

A legal right granted by a government to an inventor to exclusively produce, use, and sell an invention for a specific number of years.

Amortized

Refers to the process of gradually paying off a debt or spreading out the cost of an intangible asset over its useful life.