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, 2017.

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 $5.00, direct labor $4.35, indirect labor $0.40, utilities $0.39.
3. Fixed manufacturing costs applicable to the production of CISCO were:

Cost Item		Direct		Allocated
Depreciation		$1,900		$930
Property taxes		560		290
Insurance		950		590
		$3,410		$1,810

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 8,000 CISCO units from a supplier is $81,590.
5. If CISCO units are purchased, freight and inspection costs would be $0.34 per unit, and receiving costs totaling $1,290 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 a dollar amount		$enter a dollar amount		$enter a dollar amount
Direct labor		enter a dollar amount		enter a dollar amount		enter a dollar amount
Indirect labor		enter a dollar amount		enter a dollar amount		enter a dollar amount
Utilities		enter a dollar amount		enter a dollar amount		enter a dollar amount
Depreciation		enter a dollar amount		enter a dollar amount		enter a dollar amount
Property taxes		enter a dollar amount		enter a dollar amount		enter a dollar amount
Insurance		enter a dollar amount		enter a dollar amount		enter a dollar amount
Purchase price		enter a dollar amount		enter a dollar amount		enter a dollar amount
Freight and inspection		enter a dollar amount		enter a dollar amount		enter a dollar amount
Receiving costs		enter a dollar amount		enter a dollar amount		enter a dollar amount
Total annual cost		$enter a total amount for this column		$enter a total amount for this column		$enter a total amount for this column

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

The company should select an option                                                          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?

Answer 1

Answer :

(a)

Incremental Analysis - Shatner Manufacturing Company
Particulars	Make CISCO	Buy CISCO	Net Income Increase (Decrease)
Direct material	$ 40000		$40000
Direct labor	$ 34800		$34800
Indirect labor	$ 3200		$3200
Utilities	$3120		$3120
Depreciation	$2830	$930	$1900
Property taxes	$850	$290	$560
Insurance	$1540	$590	$950
Purchase price		$81590	-$ 81590
Freight and inspection		$2720	-$2720
Receiving costs		$1290	-$1290
Total annual costs	$86340	$87410	-$1070

(b) Company should make CISCO.

(c) Incremental profit in Buying = $ 3000 - $ 1070 = $ 1930

Company should Buy CISCO.