Question

The management of VITULLO Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called FIZBE, is a component of the company’s finished product.

         The following information was collected from the accounting records and production data for the year ending December 31, 2017.

1. 5,000 units of FIZBE were produced in the machining department.
2. Variable manufacturing costs applicable to the production each FIZBE unit were: direct materials $4.75, direct labor $4.60, Indirect labor $0.45, utilities $0.35.
3. Fixed manufacturing costs applicable to the production of FIZBE were:

COST	DIRECT	ALLOCATED
Depreciation	$1,100	$900
Property Taxes	500	200
Insurance	900_____	600_____
	$2500	$1700

All variable manufacturing and direct fixed costs will be eliminated if FIZBE is purchased. Allocated costs will have to be absorbed by other production departments.

4. The lowest quotation for 5,000 FIZBE units from a supplier is $56,000.
5. If FIZBE units are purchased, freight and inspection costs would be $0.30 per unit, and receiving costs totaling $500 per year would be incurred by the Machining Department.

Instructions

1. Prepare an incremental analysis for FIZBE. Your analysis should have columns for (1) Make FIZBE, (2) Buy FIZBE, and (3) Net Income Increase/Decrease.
2. Based on your analysis, what decision should management make?
3. Would the decision be different if VITULLO Company has the opportunity to produce $6,000 of net income with the facilities currently being used to manufacture FIZBE? Show Computations.
4. What nonfinancial factors should management consider in making its decision?

Problem 2)

Panda Corporation has four operating divisions. During the first quarter of 2014, the company reported aggregate income from operations of $129,000 and the divisional results shown below.

                                                                                  Division

	I____	___II____	_III____	IV____
Sales	$510,000	$400,000	$310,000	$170,000
Cost of Goods Sold	300,000	250,000	270,000	156,000
Selling and Administration Expenses	60,000	80,000	75,000	70,000
Income (loss) from operations	$150,000	$70,000	$(35,000)	$(56,000)

Analysis Reveals the following percentages of variable costs in each division.

                                                                                  Division

	I____	___II____	_III____	IV____
Cost of Goods Sold	70%	80%	70%	90%
Selling and Administration Expenses	40%	50%	60%	70%

Discontinuance of any division would save 50% of the fixed costs and expenses for that division.

Top management is very concerned about the unprofitable divisions (III and IV). Consensus is that one or both of the divisions should be discontinued.

Instructions

1. Compute contribution margin for Divisions III and IV.
2. Prepare an incremental analysis concerning the possible discontinuance of (1) Division III and (2) Division IV. What course of action do you recommend for each division?
3. Prepare a columnar condensed income statement for Panda Corporation, assuming Division IV is eliminated. (Use the CVP format). Division IV’s unavoidable fixed costs are allocated equally to the continuing divisions.
4. Reconcile the total income from operations ($129,000) with the total income from operations without Division IV.

Answer 1

	Problem 1:
a)					Make FIZBE	Buy FIZBE	Net income increase/decrease
					a	b	a-b
	Direct materials			(5000*4.75)	23750	0	23750
	Direct labor			(5000*4.60)	23000	0	23000
	Indirect labor			(5000*0.45)	2250	0	2250
	Utilities			(5000*0.35)	1750	0	1750
	Depreciation				2000	900	1100
	Property taxes				700	200	500
	Insurance				1500	600	900
	Purchase price				0	56000	-56000
	Freight and inspection costs			(5000*0.30)	0	1500	-1500
	Receiving costs				0	500	-500
	Total annual cost				54950	59700	-4750
b)	Management should make Fizbe since the total relevant cost is less in this case than buying alternative
c)	Yes.
	In that case total relevant cost of Buying alternative will be $ 53700 (59700-6000).
	It is less than making alternative.
	Hence, it is advisable to buy FIZBE.
d)	Nonfinancial factors:
	1) Quality and availability of vendors
	2) Capacity of the plant
	3) Availability of manpower
	4) Economy in transportation of the component