Question

CALCULATOR PRINTER VERSION RACK NI Problem 20-2A 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. 8,100 units of CISCO were produced in the Machining Department. 2. Variable manufacturing costs applicable to the production of each CISCO unit were: direct materials $5.37, direct labor $4.05, Indirect labor $0.41, utilities $0.37. 3. Fixed manufacturing costs applicable to the production of CISCO were: Cost Item Depreciation Property taxes Insurance Direct $2,000 500 900 $3,400 Allocated $930 400 590 $1,920 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. 4. The lowest quotation for 8,100 CISCO units from a supplier is $83,295. 5. If CISCO units are purchased, freight and inspection costs would be $0.35 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).)

Answer 1

Solutions:

A.

	Make CISCO	Buy CISCO	Net Income Increase / Decrease
Direct Material	43497	0	43497
direct labour	32805	0	32805
Indirect labour	3321	0	3321
Utilities	2997	0	2997
Depreciation	2930	0	2930
Property taxes	900	0	900
Insurance	1490	0	1490
Purchase price	0	83295	-83295
Freight and inspection	0	2835	-2835
Receiving costs	0	1270	-1270
Total Annual Cost	87940	87400	540

B. The company Should Purchase Because it can save $540.

C. The decision would be different if the company can produce a net income of $3000 with the facilities currently being used to produce CISCO because now it is savings only $540. $3000 net income is higher than $540.