Question 1 The management of Shatner Manufacturing Company is trying to deide wh

Question

Question 1 The management of Shatner Manufacturing Company is trying to deide 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, 2014. 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 $4.85, direct labor $4.23, indirect labor $0.45, utlities $0.43. 3. Fixed manufacturing costs applicable to the production of CiSCO were: locat Depreciation $2,010 $910 Property taxes490330 640 $3,390 $1,880 nsurance 890 All variable manufacturing and direct fixed costs will be eliminated it 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 $80,437 5. If CISCO units are purchased, freight and inspection costs would be $o.35 per unit, and receiving costs totaling $1,270 per year would be incurred by the Machining Department Prepare an Incremental analysis for cisco. (Enter nepative amounts using either a negative sign preceding the number e.g. 45 or parentheses e.g. (45).)

Explanation / Answer

Incremental Analysis Make Buy Net increase/Decrease Direct material 38800 0 38800 Direct labourr 33840 0 33840 Indirect labour 3600 0 3600 Utilities 3440 0 3440 Depreciation 2920 910 2010 property taxes 820 330 490 Insurance 1530 640 890 Purchase price 0 80437 -80437 Frieght and inspection 0 2800 -2800 Receiving cost 0 1270 -1270 Total Annual cost 84950 86387 -1437 The Company Should MAKE the product Req c: Total cost of buying 86387 Less: Net income earned from new product 3000 Net cost of buying 83387 Cost of Manufacture 84950 Incremental income of buying 1563 Hence, The company should BUY the product

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