Question

Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called CIO, 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, 2018. 1. 8,100 units of CIO were produced in the Machining Department. 2. Variable manufacturing costs applicable to the production of each CIO unit were: direct materials $4.58, direct labor $4.50, indirect labor $0.48, utilities $0.44. 3. Fixed manufacturing costs applicable to the production of CISO were: Cost Item Direct Allocated Depreciation $1,900 $930 Property taxes 530 440 Insurance 920 620 $3,350 $1,990 All variable manufacturing and direct fixed costs will be eliminated if CIO is purchased. Allocated costs will have to be absorbed by other production departments. 4. The lowest quotation for 8,100 CIO units from a supplier is $81,505. 5. If CIO 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. Prepare an incremental analysis for CIO

Make Buy Net income

Direct material

Direct labor

Indirect labor

Utilities

Depreciation

Property taxes e

Insurance

Purchase price

Freight and inspection

Receiving costs

Total annual cost

Answer 1

Solution:

Incremental Analysis
	MAKE	BUY	Effect on Net Income Increase / (Decrease)
Direct materials	$37,098 (8100*4.58)
Direct labor	$36,450 (8100*4.50)
Indirect labor	$3,888 (8100*0.48)
Utilities	$3,564 (810*0.44)
Depreciation	$1,900 (Only Direct)
Property taxes	$530 (Direct)
Insurance	$920 (Direct)
Purchase Price	$0	81505
Freight and Inspection	$0	2835
Receiving Costs	$0	1260
Total Annual Cost	$84,350	$85,600	-$1,250

The company should CONTINUE manufacturing as the buying cost from outside is higher than in house manufacturing cost.

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