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, 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 Property taxes 550 430 Insurance 960 630 $3,610 $1,940 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 receiving costs totaling $1,300 per year would be incurred by the Machining Department. Prepare an incremental analysis for CISCO.

Explanation / Answer

Incremental Analysis Incremental analysis involves the examination of alternative choices, based on the cost differences between them. Manufacture Purchase Incremental Increase/ (Decrease) Variable Cost D.Material ( 8000*4.97) $            39,760 $           39,760 D. Labour ( 8000*4.34) $            34,720 $           34,720 Indirect Labour (8000*0.42) $              3,360 $             3,360 Utilities (8000*0.36) $              2,880 $             2,880 Depreciation $              2,100 $             2,100 Property Tax $                 550 $                550 Insurance $                 960 $                960 Purchase Cost $           81,570 $          (81,570) Freight & Inspection Cost( 8000*0.37) $             2,960 $            (2,960) Receiving Cost $             1,300 $            (1,300) Total relevant Cost $            84,330 $           85,830 $            (1,500) Analysis The Cost of Manufactring gives saving of $1500 over purchase option. Hence, the management sholud manufacture the part over purchase it.

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