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, 2017.

1. 8,000 units of CISCO were produced in the Machining Department.
2. Variable manufacturing costs applicable to the production of each CISCO unit were:
    direct materials $5.04, direct labor $4.27, indirect labor $0.47, utilities $0.41.
3. Fixed manufacturing costs applicable to the production of CISCO were:

Cost Item		Direct		Allocated
Depreciation		$1,900		$900
Property taxes		510		280
Insurance		880		640
		$3,290		$1,820

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 8,000 CISCO units from a supplier is $81,890.
5. If CISCO units are purchased, freight and inspection costs would be $0.35 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).)

(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 a dollar amount		$enter a dollar amount		$enter a dollar amount
Direct labor		enter a dollar amount		enter a dollar amount		enter a dollar amount
Indirect labor		enter a dollar amount		enter a dollar amount		enter a dollar amount
Utilities		enter a dollar amount		enter a dollar amount		enter a dollar amount
Depreciation		enter a dollar amount		enter a dollar amount		enter a dollar amount
Property taxes		enter a dollar amount		enter a dollar amount		enter a dollar amount
Insurance		enter a dollar amount		enter a dollar amount		enter a dollar amount
Purchase price		enter a dollar amount		enter a dollar amount		enter a dollar amount
Freight and inspection		enter a dollar amount		enter a dollar amount		enter a dollar amount
Receiving costs		enter a dollar amount		enter a dollar amount		enter a dollar amount
Total annual cost		$enter a total amount for this column		$enter a total amount for this column		$enter a total amount for this column

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

The company should select an option                                                          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 an option                                                          NoYes

Answer 1

Solution a:

Incremental Analysis - Concord Manufacturing Company
Particulars	Make CISCO	Buy CISCO	Net Income Increase (Decrease)
Direct material	$40,320.00		$40,320.00
Direct labor	$34,160.00		$34,160.00
Indirect labor	$3,760.00		$3,760.00
Utilities	$3,280.00		$3,280.00
Depreciation	$2,800.00	$900.00	$1,900.00
Property taxes	$790.00	$280.00	$510.00
Insurance	$1,520.00	$640.00	$880.00
Purchase price		$81,890.00	-$81,890.00
Freight and inspection		$2,800.00	-$2,800.00
Receiving costs		$1,260.00	-$1,260.00
Total annual costs	$86,630.00	$87,770.00	-$1,140.00

Solution b:

Company should make CISCO

Solution c:

Incremental benefit in buying CISCO = $3,000 - $1,140 = $1,860

Company should buy CISCO