Question

The management of Borealis Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called WISCO, is a component of the company's finished product. The following information was collected from the records and production data for the year ending December 31, 2016.

8,000 units of WISCO were produced in the Machining Department.

Variable manufacturing costs applicable to the production of each WISCO unit were: direct materials $4.80, direct labor $4.30, indirect labor $0.43, utilities $0.40.

Fixed manufacturing costs applicable to the production of WISCO were:

Cost Item	Direct	Allocated
Depreciation	$2,100	$900
Property Taxes	500	200
Insurance	900	600
	$3,500	$1,700

All variable manufacturing and direct fixed costs will be eliminated if WISCO is purchased. Allocated costs will have to be absorbed by other production departments.

The lowest quotation for 8,000 WISCO units from a supplier is $80,000.

If WISCO units are purchased, freight and inspection costs would be $0.35 per unit, and receiving costs totaling $1,300 per year would be incurred by the Machining Department.

A) prepare an incremental analysis for WISCO. Your analyses should have columns for Make WISCO, Buy WISCO, and Net income increase (decrease). B) Based on your analyses, what decision should management make? C) Would the decision be different if Borealis had the opportunity to produce $3,000 of net income with the facilities currently being used to manufacture WISCO? Show calculations. D) What non financial factors should management consider in making its decisions?

Answer 1