26-2A The management of Shatner Manufacturing Company is trying to decide whethe
ID: 3198052 • Letter: 2
Question
26-2A
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. 8,100 units of CISCO were produced in the Machining Department.
2. Variable manufacturing costs applicable to the production of each CISCO unit were:
direct materials $5.37, direct labor $4.05, indirect labor $0.41, utilities $0.37.
3. Fixed manufacturing costs applicable to the production of CISCO were:
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 8,100 CISCO units from a supplier is $83,295.
5. If CISCO units are purchased, freight and inspection costs would be $0.35 per unit, and receiving costs totaling $1,270 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).)
Total annual cost
Cost Item Direct Allocated Depreciation $2,000 $930 Property taxes 500 400 Insurance 900 590 $3,400 $1,920Explanation / Answer
Incremental analysis for CISCO
If Shatner Manufacturing Company produce CISCO it will incur $52,334 annual cost while if it buys from outside it will cost $76,570. So it is advisable to produce CISCO which leads to increase net income by $24,236. Allocated fixed costs is irrelavant for decision making as it will incur in either case and will have to be absorbed by other production departments.
Net Income $ Increase Make $ Buy $ (Decrease) Direct material (8000units*$1.20) (9,600) - (9,600) Direct labor (8000units*$4.13) (33,040) - (33,040) Indirect labor (8000units*$0.41) (3,280) - (3,280) Utilities (8000units*$0.38) (3,040) - (3,040) Depreciation (1,960) - (1,960) Property taxes (470) - (470) Insurance (944) - (944) Purchase price - (72,000) 72,000 Freight and inspection(8000units*$0.40) - (3,200) 3,200 Receiving costs - (1,370) 1,370 Total annual cost (52,334) (76,570) 24,236Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.