Question

The management of Xiao Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called BIZBE, 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, 2012. 1. 6,000 units of BIZBE were produced in the Machining Department 2. Variable manufacturing costs applicable to the production of each BIZBE unit were: direct materials $4.75, direct labor $4.60, indirect labor $0.45, utilities $0.35. 3. Fixed manufacturing costs applicable to the production of BIZBE were: Cost Item Direct Allocated Depreciation $1,100 $ 900 Property taxes 500 200 Insurance 900 600 $2,500 $1,700 All variable manufacturing and direct fixed costs will be eliminated if BIZBE is purchased. Allocated costs will have to be absorbed by other production departments. 4. The lowest quotation for 6,000 BIZBE units from a supplier is $66,000. 5. If BIZBE units are purchased, freight and inspection costs would be $0.30 per unit, and receiving costs totaling $750 per year would be incurred by the Machining Department. Instructions (a) Prepare an incremental analysis for BIZBE. Your analysis should have columns for (1) Make BIZBE, (2) Buy BIZBE, and (3) Net Income Increase/Decrease. (b) Based on your analysis, what decision should management make? (c) Would the decision be different if Xiao Company has the opportunity to produce $6,000 of net income with the facilities currently being used to manufacture BIZBE? Show computations. (d) What nonfinancial factors should management consider in making its decision? DI 3R

Answer 1

Cost of the product if manufactured

Units		6,000.00
Variable costs	Per Unit
Direct materials	4.75	28,500.00
Direct labour	4.6	27,600.00
Indirect labor	0.45	2,700.00
Utilities	0.35	2,100.00
Varible cost		60,900.00
Direct Fixed Costs		2,500.00
Allocated Fixed Costs		1,700.00
Total Fixed costs		4,200.00
Total cost of manufacturing'	65,100.00
If BIZBE is procured from suppliers
Quotation price		66000
Allocated costs (relevant costs)		1700
Transportation costs	0.3	1,800.00
receiving costs		750
Total procurement cost	70250
Net increase in Cost		5,150.00

Based on above calculations management should go for own manufacturing.

Currently the company has the benefit of 5,150 from manufacturing rather than procuring, if company has alternative option of manucturing rather than BIZBE which is more than 5,150 than the alternative production is feasible

Other product Net income - 6000

BIZBE net income - 5150

Net surplus - 850

It is advuised to go for other product

4. Non financial factors also management should consider as they are very important while going for the other options

a. Quality

b. Supplier relation

c. process control

d. Trade Secret