The management of Shatner Manufacturing Company is trying to decide whether to c

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 $4.60, direct labor $4.19, indirect labor $0.42, utilities $0.40.
3. Fixed manufacturing costs applicable to the production of CISCO were:
Cost Item Direct Allocated Depreciation $1,900 $920 Property taxes 540 270 Insurance 870 630 $3,310 $1,820
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 $77,520.
5. If CISCO units are purchased, freight and inspection costs would be $0.34 per unit, and receiving costs totaling $1,300 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 $ $ $ Direct labor Indirect labor Utilities Depreciation Property taxes Insurance Purchase price Freight and inspection Receiving costs    Total annual cost $ $ $

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

NoYes

Explanation / Answer

(a)

Note: Only relevant fixed costs that is direct and avoidable fixed costs have been considered in calculating total manufacturing cost of Cisco.

b) Make Cisco as on purchasing the net income will decrease by $1350

c) If the relaesed capacity is used to generate $3000 additional net income, then it is better to Buy Cisco. As in that case the net income of the company will increase by $3000 - $1350 = $1650

Cost elements Make Cisco Buy Cisco Net Income Increase/ (Decrease) Direct materials 36800 36800 Direct labour 33520 33520 Indirect labour 3360 3360 Utilities 3200 3200 Depreciation 1900 1900 Property taxes 540 540 Insurance 870 870 Purchase Price 77520 -77520 freight and inspection 2720 -2720 Receiving cost 1300 -1300 Total Annual Cost($) 80190 81540 -1350

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