Problem 20-2A The management of Shatner Manufacturing Company is trying to decid

Question

Problem 20-2A 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. 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 $4.97, direct labor $4.34, indirect labor $0.42, utilities $0.36 3. Fixed manufacturing costs applicable to the production of CISCO were: Cost Item Direct Allocated Depreciation $2,100 $880 430 960 630 $3,610 $1,940 Property taxes Insurance S50 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 $81,570 5. If CISCO units are purchased, freight and inspection costs would be $0.37 per unit, and recei ng costs totaling SL 300 per year ould be incurred ·he Machining Department.

Explanation / Answer

Answer a Incremental analysis for CISCO Make CISCO Buy CISCO Net Income Increase / (Decrease) Direct Material $39,760 $39,760 Direct Labour $34,720 $34,720 Indirect Labour $3,360 $3,360 Utilities $2,880 $2,880 Depreciation $2,100 $2,100 Property taxes $550 $550 Insurance $960 $960 Purchase price $81,570 -$81,570 Freight and Inspection $2,960 -$2,960 Receiving costs $1,300 -$1,300 Total Annual cost $84,330 $85,830 -$1,500 Answer b Buying of CISCO will result in fall of net income by $1500 per year. Hence, the company should to make CISCO. Answer 3 If Sharter company has opportunity to produce $3000 net income with the facilities currently being used to maufacture CISCO, then Company should buy CISCO as this will result increase in net income by $1500.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.