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. 8,100 units of CISCO were produced in the Machining Department. 2. Variable manufacturing costs applicable to the production of each CISCO unit were: direct materials $4.65, direct labor $4.46, indirect labor $0.45, utilities $0.38. 3. Fixed manufacturing costs applicable to the production of CISCO were: Cost Item Direct Allocated Depreciation $2,000 $870 Property taxes 480 350 Insurance 860 630 $3,340 $1,850 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 $80,707. 5. If CISCO units are purchased, freight and inspection costs would be $0.37 per unit, and receiving costs totaling $1,310 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).) Make CISCO Buy CISCO Net Income Increase (Decrease) Direct material $ $ $ Direct labor Indirect labor Utilities Depreciation Property taxes Insurance Purchase price Freight and inspection Receiving costs Total annual cost $ $ $ (b) Based on your analysis, what decision should management make? The company should . (c) Would the decision be different if Shatner Company has the opportunity to produce $3,000 of net income with the facilities currently being used to manufacture CISCO?

Answer 1

Solution a:
Incremental Analysis - Shatner Manufacturing Company
Particulars	Make CISCO	Buy CISCO	Net Income Increase (Decrease)
Direct material	$37,665.00		$37,665.00
Direct labor	$36,126.00		$36,126.00
Indirect labor	$3,645.00		$3,645.00
Utilities	$3,078.00		$3,078.00
Depreciation	$2,870.00	$870.00	$2,000.00
Property taxes	$830.00	$350.00	$480.00
Insurance	$1,490.00	$630.00	$860.00
Purchase price		$80,707.00	-$80,707.00
Frieght and inspection		$2,997.00	-$2,997.00
Receiving costs		$1,310.00	-$1,310.00
Total annual costs	$85,704.00	$86,864.00	-$1,160.00

Solution b: The company should make CISCO solution c: Yes, In this situation company should buy CISCO because company will save extra = $3,000 - $1,160 = $1,840