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. 8,100 units of CISCO were produced in the Machining Department.
2. Variable manufacturing costs applicable to the production of each CISCO unit were:
    direct materials $4.65, direct labor $4.46, 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		$870
Property taxes		480		350
Insurance		860		630
		$3,340		$1,850

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 8,100 CISCO units from a supplier is $80,707.
5. If CISCO units are purchased, freight and inspection costs would be $0.37 per unit, and receiving costs totaling $1,310 per year would be incurred by the Machining Department.

Answer 1

	Evaluation of bur or produce a component of finished goods
		Cost of production of 8,100 units CISCO
	Cell Reference	Particulars	$
	A	Direct Material	4.65
	B	Direct Labor	4.46
	C	indirect Labor	0.45
	D	utilities	0.38
	E=A+B+C+D	Total cost per unit	9.94
	F	No of unit (CISCO) required per year	8,100.00
	G=E*F	Total variable cost of production	80,514.00
	H	Add:- Direct fixed cost	3,340.00
	I	Add:- Allocated fixed cost	1,850.00
	J=G+H+I	Total cost of production of 8,100 CISCO	85,704.00
		Cost of purchasing of 8,100 units CISCO
	Cell Reference	Particulars	$
	A	Purchase price of 8,100 CISCO	80,707.00
	B	inspection cost (8,100*0.37)	2,997.00
	C	Receiving cost	1,310.00
	D=A+B+C		85,014.00
	Saving in cost if CISCO is purchased (85,704-85,014)= 690
	Note:- In case of purchase of CISCO we have assumed the allocated fixed cost will be absorbed by the other department therefore the same is not considered in cost of purchase decision
	Based on the above calculation the decision to purchase CISCO would save the Cost of $ 690 therefore the Company should buy the CISCO instead of producing the same