The management of Shatner Manufacturing Company is trying to decide whether to c

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, 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 $4.53, direct labor $4.17, indirect labor $0.48, utilities $0.37.
3. Fixed manufacturing costs applicable to the production of CISCO are below:

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 $77,058.
5. If CISCO units are purchased, freight and inspection costs would be $0.36 per unit, and receiving costs totaling $1,280 per year would be incurred by the Machining Department.

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).)

$1,920

Based on your analysis, what decision should management make?

Would the decision be different if Shatner Company has the opportunity to produce $4,550 of net income with the facilities currently being used to manufacture CISCO?

Cost Item Direct Allocated Depreciation $1,990 $ 900 Property taxes 480 450 Insurance 870 570 $3,340

$1,920

Explanation / Answer

Make CISCO Buy CISCO Net Income Increase (Decrease) Direct material 36240 Direct labor 33360 Indirect labor 3840 Utilities 2960 Depreciation 2890 900 Property taxes 930 450 Insurance 1440 570 Purchase price 77058 Freight and inspection 2880 Receiving costs 1280    Total annual cost 81660 83138 -1478 Management would continue to manufacture If the company have the oppurtunity to produce $4,550 of the net income, then its best to buy CISCO

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