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 $5.08, direct labor $4.15, indirect labor $0.41, utilities $0.44.
3. Fixed manufacturing costs applicable to the production of CISCO were:

Cost Item		Direct		Allocated
Depreciation		$1,900		$910
Property taxes		540		340
Insurance		920		580
		$3,360		$1,830

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 $79,899.
5. If CISCO units are purchased, freight and inspection costs would be $0.37 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).)

		Make CISCO		Buy CISCO		Net Income Increase (Decrease)
Direct material		$enter direct material in dollars		$enter direct material in dollars		$enter direct material in dollars
Direct labor		enter direct labor in dollars		enter direct labor in dollars		enter direct labor in dollars
Indirect labor		enter indirect labor in dollars		enter indirect labor in dollars		enter indirect labor in dollars
Utilities		enter utilities in dollars		enter utilities in dollars		enter utilities in dollars
Depreciation		enter depreciation in dollars		enter depreciation in dollars		enter depreciation in dollars
Property taxes		enter property taxes in dollars		enter property taxes in dollars		enter property taxes in dollars
Insurance		enter insurance in dollars		enter insurance in dollars		enter insurance in dollars
Purchase price		enter the purchase price in dollars		enter the purchase price in dollars		enter the purchase price in dollars
Freight and inspection		enter freight and inspection in dollars		enter freight and inspection in dollars		enter freight and inspection in dollars
Receiving costs		enter receiving costs in dollars		enter receiving costs in dollars		enter receiving costs in dollars
Total annual cost		$enter total annual cost in dollars		$enter total annual cost in dollars		$enter total annual cost in dollars

(b) Based on your analysis, what decision should management make?

The company should select between make and buybuy CISCOmake CISCO make CISCObuy CISCO.

(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?

select between Yes and NoYesNo YesNo

Answer 1

				7,900	7,900
				Make	Buy	Net income
				CISCO	CISCO	increase(Decrease)
5.08	Direct Material			40132		40132
4.15	Direct labor			32785		32785
0.41	Indirect labor			3239		3239
0.44	Utilities			3476		3476
	Depreciation			1,900		1,900
	Property taxes			540		540
	insurance			920		920
	purchase price				79,899	-79,899
0.37	Freight and inspection				2923	-2923
	Receiving costs				1,270	-1,270
	total annual cost			82992	84092	-1100
b)	more cost effective to make the part
c)				Make	Buy	Net income
				CISCO	CISCO	increase(Decrease)
	total annual cost			82992	84092	-1100
	opportunity cost			3,000	0	3,000
	total cost			85992	84092	1900
	yes