Question

The management of Bramble 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 $5.36, direct labor $4.52, indirect labor $0.42, utilities $0.43.
3. Fixed manufacturing costs applicable to the production of CISCO were:

Cost Item		Direct		Allocated
Depreciation		$2,000		$930
Property taxes		470		440
Insurance		960		660
		$3,430		$2,030

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 $87,297.
5. If CISCO units are purchased, freight and inspection costs would be $0.36 per unit, and receiving costs totaling $1,260 per year would be incurred by the Machining Department.

Answer 1

Solution:

Incremental Analysis - Bramble Manufacturing Company
Particulars	Make CISCO	Buy CISCO	Net Income Increase (Decrease)
Direct material	$43,416.00		$43,416.00
Direct labor	$36,612.00		$36,612.00
Indirect labor	$3,402.00		$3,402.00
Utilities	$3,483.00		$3,483.00
Depreciation	$2,930.00	$930.00	$2,000.00
Property taxes	$910.00	$440.00	$470.00
Insurance	$1,620.00	$660.00	$960.00
Purchase price		$87,297.00	-$87,297.00
Frieght and inspection		$2,916.00	-$2,916.00
Receiving costs		$1,260.00	-$1,260.00
Total annual costs	$92,373.00	$93,503.00	-$1,130.00

Company should continue to manufacture part.