Question

In: Accounting

The management of Shatner Manufacturing Company is trying to decide whether to continue manufacturing a part...

The management of Shatner Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called CISCO, 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, 2020.

1. 8,000 units of CISCO were produced in the Machining Department.
2. Variable manufacturing costs applicable to the production of each CISCO unit were:
    direct materials $5.04, direct labor $4.27, indirect labor $0.47, utilities $0.41.
3. Fixed manufacturing costs applicable to the production of CISCO were:

Cost Item Direct Allocated
Depreciation $1,900 $900
Property taxes 510 280
Insurance 880 640
$3,290 $1,820


All variable manufacturing and direct fixed costs will be eliminated if CISCO is purchased. Allocated costs will not be eliminated if CISCO is purchased. So if CISCO is purchased, the fixed manufacturing costs allocated to CISCO will have to be absorbed by other production departments.

4. The lowest quotation for 8,000 CISCO units from a supplier is $81,890.
5. If CISCO units are purchased, freight and inspection costs would be $0.35 per unit, and receiving costs totaling $1,260 per year would be incurred by the Machining Department.

(a) Prepare an incremental analysis for CISCO. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Make CISCO Buy CISCO Net Income
Increase
(Decrease)
Direct material $enter direct material in dollars $enter direct material in dollars $enter direct material in dollars
Direct labor enter direct labor in dollars enter direct labor in dollars enter direct labor in dollars
Indirect labor enter indirect labor in dollars enter indirect labor in dollars enter indirect labor in dollars
Utilities enter utilities in dollars enter utilities in dollars enter utilities in dollars
Depreciation enter depreciation in dollars enter depreciation in dollars enter depreciation in dollars
Property taxes enter property taxes in dollars enter property taxes in dollars enter property taxes in dollars
Insurance enter insurance in dollars enter insurance in dollars enter insurance in dollars
Purchase price enter the purchase price in dollars enter the purchase price in dollars enter the purchase price in dollars
Freight and inspection enter freight and inspection in dollars enter freight and inspection in dollars enter freight and inspection in dollars
Receiving costs enter receiving costs in dollars enter receiving costs in dollars enter receiving costs in dollars
   Total annual cost $enter total annual cost in dollars $enter total annual cost in dollars $enter total annual cost in dollars



(b) Based on your analysis, what decision should management make?

The company should select between make and buy                                                          make CISCObuy CISCO.



(c) Would the decision be different if Shatner Company has the opportunity to produce $3,000 of net income with the facilities currently being used to manufacture CISCO?

select between Yes and No                                                          YesNo

Solutions

Expert Solution

Other fixed costs which are allocated are not included in the calculation beacause those costs are incurred under both options that that is under buy CISCO and also Make CISCO. So those costs are irrelevant for the decision making purpose.

if you have any query please leave your query in comment section so that I can clarify your query.

Thank you.


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