Question

Problem 21-2A 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 $ 5.36 , direct labor $ 4.52 , indirect labor $ 0.42 , utilities $ 0.43. 3. Fixed manufacturing costs applicable to the production of CISCO were: Cost Item Allocated Direct $ 2,000 $ 930 Depreciation Property taxes 470 440 Insurance 960 660 $ 3,430 $ 2,030 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 $ 87,297. 5. If CISCO units are purchased, freight and inspection costs would be $ 0.36 per unit, and receiving costs totaling $ 1,260 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 24 (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

1 Answers @ Koke. Buy Net income increase CISCO ($) Cisco ($) decrease) Direct material (8100x 5.36) 43,476 43,416 pivect labor (8,100x4.52) 36,612 36,612 Indirect labor (8100 x 0.42) 3402 3,402 utilities (8100X0:43) 3483 3483 Depreciation (20001 930) 2930 1930 2000 property taxey (470+440) 910 440 1470 Insurance (960+660) 1620 660 1960 purchase price 87,297 87,297) Freight and inspection 2916 2916) (8100 X 0.36) Receiving costa o 1260 1(1260) Total Annual est 92,373 93,503 (130) (6) The company should continue to make Cisco, because lit it decides to purchase it from out side. It could refult in decrease in her income by $ 1130 (e) yes, It would be different Net income Enereage - Additional income - Decrcoye in income from buying =$3000-$1,137 = $1,870