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, 2014. 7,900 units of CISCO were produced in the Machining Department. Variable manufacturing costs applicable to the production of each CISCO unit were: direct materials $1.90, direct labor $4.26, indirect labor $0.44, utilities $0.38. Fixed manufacturing costs applicable to the production of CISCO were: 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. The lowest quotation for 7,900 CISCO units from a supplier is $63,200. If CISCO units are purchased, freight and inspection costs would be $0.20 per unit, and receiving costs totaling $1, 260 per year would be incurred by the Machining Department. Prepare an incremental analysis for CISCO. Prepare an incremental analysis for CISCO.

Explanation / Answer

Answer:

Number of units = 7900

Costs for which the per unit cost is given is calculated as: No. of units x Cost per unit

Incremental analysis for CISCO:

Therefore, net decrease in income would be $9084 if management decides to buy the CISCO from outside.

Note: Decrease in net income are shown by a negative sign.

Make Buy Net income increase (decrease) Direct material @ $1.90/unit $ 15,010.00 $                -   $                                           15,010.00 Direct labor @ $4.26/unit $ 33,654.00 $                -   $                                           33,654.00 Indirect labor @$0.44/unit $   3,476.00 $                -   $                                             3,476.00 Utilities @ $0.38 per unit $   3,002.00 $                -   $                                             3,002.00 Depreciation $   2,100.00 $       720.00 $                                             1,380.00 Property taxes $       500.00 $       260.00 $                                                 240.00 Insurance $       882.00 $       688.00 $                                                 194.00 Purchase price $                -   $ 63,200.00 $                                         -63,200.00 Freight and inspection @ $0.20/unit $                -   $   1,580.00 $                                            -1,580.00 Receiving cost $                -   $   1,260.00 $                                            -1,260.00 Total annual cost $ 58,624.00 $ 67,708.00 $                                            -9,084.00

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