Problem 20-2A The management of Shatner Manufacturing Company is trying to decid

Question

Problem 20-2A 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 $5.10, direct labor $4.88, indirect labor $0.45, utilities $0.44. 3. Fixed manufacturing costs applicable to the production of CISCO were Cost Item Direct Allocated Depreciation Property taxes Insurance $1,900 $920 420 620 $3,280 $1,960 490 All varlable manufacturing and direct flxed costs will be eliminated if CISCO is purchased. Allocated costs will have to be absorbed by other production departments. . The lowest quotation for 8,000 CISCO units from a supplier is $87,390 5·If CISCO units are purchased, freight and inspection costs would be $0.34 per unit, and receiving costs totaling $1,310 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).) Net Income Increase Make CISCO Buy CISCo (Decrease) Direct material Direct labor

Explanation / Answer

a) Make CISCO Buy CISCO Net Income Increase (Decrease) Direct material (8000 x 5.1) $        40,800 $            40,800 Direct labor (8000 x 4.88)            39,040 $            39,040 Indirect labor (8000 x 0.45)              3,600 $              3,600 Utilities (8000 x 0.44)              3,520 $              3,520 Depreciation              1,900 $              1,900 Property taxes                  490 $                  490 Insurance                  890 $                  890 Purchase price        87,390 $          (87,390) Freight and inspection (8000 x 0.34)           2,720 $            (2,720) Receiving costs           1,310 $            (1,310) Total annual cost $        90,240 $    91,420 $            (1,180) b) The company should Make the CISCO. C) Net income should increase by (3000-1180 = $1820) Yes , company should buy now

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