Question

Problem 20-02A a-c 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, 2020. 1. 7,900 units of CISCO were produced in the Machining Department. 2. Variable manufacturing costs applicable to the production of each CISCO unit were: direct materials $5.08, direct labor $4.15, indirect labor $0.41, utilities $0.44. 3. Fixed manufacturing costs applicable to the production of CISCO were: Cost Item Depreciation Property taxes Insurance Direct $1,900 540 920 $3,360 Allocated $910 340 580 $1,830 All variable manufacturing and direct fixed costs will be eliminated if CISCO is purchased. Allocated costs will not be eliminated if CISCO is purchased. So if CISCO is purchased, the fixed manufacturing costs allocated to CISCO will have to be absorbed by other production departments. 4. The lowest quotation for 7,900 CISCO units from a supplier is $79,899 5. IF CISCO units are purchased, freight and inspection costs would be $0.37 per unit, and receiving costs totaling $1,270 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).) Net Income Increase (Decrease) Make CISCO Buy CISCO 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 (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?

Answer 1

a)

	Make CISCO	Buy CISCO	Net income (Decrease)
Direct material	40,132.00		40,132.00
Direct Labor	32,785.00		32,785.00
Indirect labor	3,239.00		3,239.00
Utilities	3,476.00		3,476.00
Depreciation	2,810.00	910.00	1,900.00
Property taxes	880.00	340.00	540.00
Insurance	1,500.00	580.00	920.00
Purchase price		79,899.00	-                              79,899.00
Freight and inspection		2,923.00	-                                 2,923.00
Receiving costs		1,270.00	-                                 1,270.00
Total annual cost	84,822.00	85,922.00	-                                 1,100.00

b)The company should continue to make CISCO

c)Yes