Question

The management of Shatner Manufacturing Company is trying to decide whetehr 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. 8000 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

3. fixed manufacturing cost applicable to the production of CISCO were: Cost Item, Deprecitation - Direct 2,100, Allocated $900. Property taxes - Direct 500, Allocated 200. Insurance 900, allocated 600.

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 hve 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 ad inspection costs would be $0.35 per unit, and receiving costs totaling $1,300 per year would be incurred by the Machining Department.

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?

c. Would the decision be diffierent if Shatner Company has the opportunity to produce $3,000 fo the net income with the facilities currently being used to manufacture CISCO? Show computations

de. What nonfinancial factors should management consider in making its decision?

Answer 1

Ans: Shatner Manufacturing Company

Manufacture a Part called CISCO which is a part of Company's Finished Product

Direct Material Per Unit- $4.80

Direct labor Cost per Unit-$4.30

Indirect Labor -$0.43

Utilities- $0.40

Purchase Cost per Unit- $10

Inspection cost per unit - $0.35

Receiving costs totaling $1,300 per year

Particulars	Made ($)(a)	Purchase($)(b)	Net Income Increase/ decrease($)(b-a)
Direct Material Per Unit	4.8		-4.8
Direct labor Cost per Unit	4.30		-4.3
Indirect Labor	0.43		-0.43
Utilities	0.4		-0.4
Purchase Cost		10	10
Inspection Cost per Unit		0.35	0.35
Total	9.93	10.35	0.42
Number of Units	8,000	8,000	8,000
Total Variable Cost	79,440	82,800	3,360
Add: Direct Fixed Cost
Depriciation	2,100		-2,100
Property Tax	500		-500
Insurence	900		-900
Receiving costs		1,300	1,300
Total	82,940	84,100	1,160

Allocated Cost is Irrelevant cost as it does not affect the decision making

b) Make CISCO rather than purchasing it from Outside as it would increase the income by $1,160.

c) Opportunity to produce $3,000 of net income with the facilities currently being used to manufacture CISCO

Increase in revenue from Purchasing CISCO from Outside - $3,000-$1,160

                                                                                             - $1,840

So company should Purchase from Outside

d)  Non-financial factors should management consider in making its decision are

i ) Quality of product deliver by the vendor is to be similar or better than the quality of goods manufactured by the Company itself

ii) Ability of the Vendor to supply the same quality of product at the same price for a longer time frame.