Problem 21-2A The management of Shatner Manufacturing Company is trying to decid

Question

Problem 21-2A 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. 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 $ 4.50 , direct labor 4.00 , indirect labor $ 0.40 , utilities $ 0.35 3. Fixed manufacturing costs applicable to the production of CISCO were: Cost Item Depreciation Property taxes Insurance Direct Allocated 1,900860 260 560 3,220 1,680 460 860 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 7,900 CISCO units from a supplier is $ 73,349 5. If CISCO units are purchased, freight and inspection costs would be 0.34 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).) Net Income Increase (Decrease) Make CISCO Buy CISCO Direct material Direct labor Indirect labor Utilities Depreciation Property taxes Insurance Purchase price Freight and inspection

Explanation / Answer

SOLUTION

(A)

(B) The company should continue to make CISCO.

(C) Yes, it would be different.

Make CISCO ($) Buy CISCO ($) Net income increase / (Decrease) Direct material (7,900 * $4.50) 35,550 35,550 Direct labor(7,900 * $4.00) 31,600 31,600 Indirect labor(7,900 * $0.40) 3,160 3,160 Utilities(7,900 * $0.35) 2,765 2,765 Depreciation 2,760 860 1,900 Property taxes 720 260 460 Insurance 1,420 560 860 Purchase price 0 73,349 (73,349) Freight and inspection(7,900*$0.34) 0 2,686 (2,686) Receiving costs 0 1,260 (1,260) Total annual cost 77,975 78,975 (1,000)

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