Question

The management of Pina 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, 2017. 1. 7,900 units of CISCO were produced in the Machining Department. 2. Variable manufacturing costs applicable to the production of each CISCO unit were:     direct materials $4.58, direct labor $4.51, indirect labor $0.45, utilities $0.41. 3. Fixed manufacturing costs applicable to the production of CISCO were: Cost Item Direct Allocated Depreciation $1,900 $860 Property taxes 530 320 Insurance 870 610 $3,300 $1,790 All variable manufacturing and direct fixed costs will be eliminated if CISCO is purchased. Allocated costs will have to be absorbed by other production departments. 4. The lowest quotation for 7,900 CISCO units from a supplier is $78,853. 5. If CISCO units are purchased, freight and inspection costs would be $0.38 per unit, and receiving costs totaling $1,260 per year would be incurred by the Machining Department.

Prepare an incremental analysis for CISCO. (If amount decreases net income then enter the amount 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 $ $ $ Direct labor Indirect labor Utilities Depreciation Property taxes Insurance Purchase price Freight and inspection Receiving costs    Total annual cost $ $ $ LINK TO TEXT

Based on your analysis, what decision should management make? The company should   make CISCObuy CISCO . LINK TO TEXT

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

Answer 1

Answer:

STATEMENT OF INCREMENTAL ANALYSIS
	Make CISCO	Buy CISCO	Net Income Increase (Decrease)
Direct material (7,900 × $4.58)	$      36,182		$       36,182
Direct labour (7,900 × $4.51)	35,629		35,629
Indirect labour (7,900 × $0.45)	3,555		3,555
Utilities (7,900 × $0.41)	3,239		3,239
Depreciation	1,900		1,900
Property taxes	530		530
Insurance	870		870
Purchase price		78,853	(78,853)
Freight & inspection (7,900 × $0.38)		3,002	(3,002)
Receiving costs		1,260	(1,260)
Total annual relevant cost	$      81,905	$     83,115	$       (1,210)

Note:The allocated costs are unavoidable and hence irrelevant to the decision

The Cost of Manufacturing gives saving of $1,210 over purchase option. Hence, the management sholud manufacture the part instead of purchasing it from outside.

Yes, the decision would be different if Pina Company has the opportunity to produce $3,000 of net income with the facilities currently being used to manufacture CISCO