Problem 20-2A All variable manufacturing and direct fixed costs will be eliminat

Question

Problem 20-2A

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 $82,490.
5. If CISCO units are purchased, freight and inspection costs would be $0.35 per unit, and receiving costs totaling $1,270 per year would be incurred by the Machining Department.

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).)

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, 2014.

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 $4.92, direct labor $4.43, indirect labor $0.45, utilities $0.45.
3. Fixed manufacturing costs applicable to the production of CISCO were: Cost Item Direct Allocated Depreciation $1,940 $ 910 Property taxes 520 400 Insurance 930 580 $3,390 $1,890

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 $82,490.
5. If CISCO units are purchased, freight and inspection costs would be $0.35 per unit, and receiving costs totaling $1,270 per year would be incurred by the Machining Department.

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 $ $ $

Explanation / Answer

ANSWER 1:-

ANSWER 2:- The company should continue to MAKE CISCO.

ANSWER 3:-

Yes , decision would be different. Here, the company should opt to purchase CISCO.

INCREMENTAL ANALYSIS PARTICULARS MAKE CISCO BUY CISCO NET INCOME INCREASE/(DECREASE) $ $ $ Direct Material 39360 0 39360 Direct labour 35440 0 35440 Indirect Labour 3600 0 3600 Utilities 3600 0 3600 Depreciation 2850 910 1940 Property Taxes 920 400 520 Insurance 1510 580 930 Purchase Price 0 82490 -82490 Frieght & Inspection 0 2800 -2800 Receiving Costs 0 1270 -1270 Total Annual cost 87280 88450 -1170

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