Question

P21-2B The management of Gill Corporation is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called FIZBE. is a component of the company's finished product. This information was collected for the year ending December 31, 2017 1. 5,000 units of FIZBE were produced in the Machining Department. 2. Variable manufacturing costs applicable to the production of each FIZBE un direct materials $4.75, direct labor $4.60, indirect labor $0.45, utilities $0.35 3. Fixed manufacturing costs applicable to the production of FIZBE were: Cost Item Direct Allocated Depreciation $1,100 $ 900 Property 500 200 taxes Insurance 900 600 $2.500 $1.700 All variable manufacturing and direct fixed costs will be eliminated if FIZBE is purchased. Allocated costs will have to be absorbed by other production departments 4. The lowest quotation for 5,000 FIZBE units from a supplier is $56,000. 5. FIZBE units are purchased, freight and inspection costs would be $0.30 per unit, and receiving costs totaling $500 per year would be incurred by the Machining Department. Instructions (a) Prepare an incremental analysis for FIZBE. Your analysis should have columns for (1) Make FIZBE, (2) Buy FIZBE, and (3) Net Income Increase/Decrease. (b) Based on your analysis, what decision should management make? Prob 21-2B Make Buy Net Income Increase or Decrease Direct materials Direct labor Indirect labor Utilities Depreciation Property taxes Insurance Purchase price Freight & inspection Receiving costs Total Annual Cost b) Decision? 21-2 Copyright 2015 John Wiley & Sons, Incw a s and Managerial Accounting Solutions Manual (For instructor Use Only

Answer 1

1						Make	Buy	Net income increase or decrease
	Direct materials			(5000*4.75)		23750	0	23750
	Direct labor			(5000*4.60)		23000	0	23000
	Indirect labor			(5000*0.45)		2250	0	2250
	Utilities			(5000*0.35)		1750	0	1750
	Depreciation			(Only direct cost)		1100	0	1100
	Property taxes			(Only direct cost)		500	0	500
	Insurance			(Only direct cost)		900	0	900
	Purchase price					0	56000	-56000
	Freight and inspection			(5000*0.30)		0	1500	-1500
	Receiving costs					0	500	-500
	Total annual cost					53250	58000	-4750
2	Management should make the component since buying the component results in a decrese in net income of $ 4750
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