Question

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 $5.30, direct labor $4.25, indirect labor $0.45, utilities $0.38.
3. Fixed manufacturing costs applicable to the production of CISCO were:

Cost Item		Direct		Allocated
Depreciation		$2,000		$930
Property taxes		500		410
Insurance		950		600
		$3,450		$1,940

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 $83,660.
5. If CISCO units are purchased, freight and inspection costs would be $0.37 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                                                          buy CISCOmake 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

Answer 1

Ans.

(a) Prepare an incremental analysis for CISCO.

	Make CISCO	Buy CISCO	Net Income Increase (Decrease)
Direct material	$42,400		$42,400
Direct labor	$34,000		$34,000
Indirect labor	$3,600		$3,600
Utilities	$3,040		$3,040
Depreciation	$2,930	$930	$2,000
Property taxes	$910	$410	$500
Insurance	$1,550	$600	$950
Purchase price		$83,660	$(83,660)
Freight and inspection		$2,960	$(2,960)
Receiving costs		$1,260	$(1,260)
Total annual cost	$88,430	$89,820	$(1,390)

Working Notes:-

	8,000 units of CISCO were produced in the Machining Department	Amount
1	Direct material (8,000 units x $5.30)	$42,400
2	Direct labor (8,000 units x $4.25)	$34,000
3	Indirect labor (8,000 units x $0.45)	$3,600
4	Utilities (8,000 units x $0.38)	$3,040
5	Depreciation ($2,930 - $930)	$2,000
6	Property taxes ($910 - $410)	$500
7	Insurance ($1,550 - $600)	$950
8	Purchase price	$(83,660)
9	Freight and inspection (8,000 units x $0.37)	$(2,960)
10	Receiving costs	$(1,260)
	Total annual cost	$(1,390)

Ans. b The company should make CISCO, because if the company buy it from an outside supplier. The net income is decrease by $1,390.

Ans. c Yes, 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.

Net income=Opportunity cost - Total annual cost

Net income=$3,000 - $1,390

Net income=$1,610

The Net income increase by $1,610. Hence, company should buy CISCO.