Question

90 % - 1 x 541 of 808 Use incremental analysis related to make or buy consider opportunity cost, and identify nonfinancial factors (LO 3), E P12-2 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, 2017 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 $4.80, direct labor $4.30, indirect labor $0.43, utilities $0.40. Copyright 2017 John Wiley & Sons, Inc. Problems 523 3. Fixed manufacturing costs applicable to the production of CISCO were: Direct 32.100 Allocated $900 Cost Item Depreciation Property taxes Insurance 500 200 000 $3.500 $1.700 All variable manufacturing and direct fixed costs will be eliminated if CISCO is pur chased. Allocated costs will have to be absorbed by other production departments. 4. The lowest quotation for 8.000 CISCO units from a supplier is $80,000 5. If CISCO units are purchased, freight and inspection costs would be $0.35 per unit, and receiving costs totaling $1,300 per year would be incurred by the Machining Department (a) NI (decrease) ${1,160) Instructions (a) Prepare an incremental analysis for CISCO. Your analysis should have columns for (1) Make CISCO, (2) Buy CISCO, and (3) Net Income Increase/Decrease). (b) Based on your analysis, what decision should management make? (e) 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? Show computations. (d) What nonfinancial factors should management consider in making its decision? l increase $1,840

Answer 1

Answer to P12-2 (a) Make CISCO Per Unit In $ QTY 8000 Buy CISCO Per Unit In $ 80,000 Variable Manufacturing Cost/Purchase Cost Direct Material Direct Labour Indirect Labour Utilities Sub Total-Variable Manfufacturing/Purchase Cost 4.80 4.30 0.43 0.40 38,400 34,400 3,440 3,200 (A) 9.93 79,440 80,000 Fixed Manufaturing Cost Direct Depreciation Property Taxes Insurance Sub Total- Direct Fixed Manufacturing Cost (B) 2,100 500 900 3,500 Fixed Manufaturing Cost Allocated Depreciation Property Taxes Insurance 200 600 200 600 Sub Total-Allocated Fixed Manufacturing Cost © 1,700 1,700 0.35 Freight and Inspection Cost (D) Receiving Cost 2,800 1,300 Total Cost (A+B+C+D+E) 84,640 85,800 Net Income Increase/(Decrease) $ (1,160) Answer to P12-2 (b) Based on our analysis above the company should continue manufacturing CISCO Answer to P12-2 (c) Particulars Decrease in Income by purchasing CISCO Increase in income with the facilities eaarlier used to manufacture CISCO Net Income increase In $ (1,160) 3,000 1,840 Answer to P12-2 (d) Non Financial factors that should be considered: Ensuring timely supply of CISCO is an important factor to be considered Ensuring quality of CISCO Reputation of company would be at stake