Question

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 $5.11, direct labor $4.48, indirect labor $0.48, utilities $0.39. 3. Fixed manufacturing costs applicable to the production of CISCO were: Cost Item Depreciation Direct $2,000 Allocated $900 Property taxes 540330 Insurance 940 $3,480 560 $1,790 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 $83,151. 5. If CISCO units are purchased, freight and inspection costs would be $0.37 per unit, and receiving costs totaling $1,280 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

Incremental Analysis
Units	7900	7900
	Make	Buy	Net Income Increase
Direct Material	40,369		40,369
Direct Labor	35,392		35,392
Indirect Labor	3,792		3,792
Utilities	3,081		3,081
Depreciation	2,900	900	2,000
Property Taxes	870	330	540
Insurance	1500	560	940
Purchase Price		83,151	-83,151
Freight and Inspection		2,923	-2,923
Receiving costs		1,280	-1,280
Total Annual cost	87,904	89,144	-1,240
Better to make
Note that the allocated costs are unavoidable and hence irrelevant to the decision