Question

The management of Shatner Manufacturing Company is trying to decide whether to continue manufacturing a part...

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 $5.10, direct labor $4.88, indirect labor $0.45, utilities $0.44.
3. Fixed manufacturing costs applicable to the production of CISCO were:

Cost Item Direct Allocated
Depreciation $1,900 $920
Property taxes 490 420
Insurance 890 620
$3,280 $1,960


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 $87,390.
5. If CISCO units are purchased, freight and inspection costs would be $0.34 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 $enter a dollar amount $enter a dollar amount $enter a dollar amount
Direct labor enter a dollar amount enter a dollar amount enter a dollar amount
Indirect labor enter a dollar amount enter a dollar amount enter a dollar amount
Utilities enter a dollar amount enter a dollar amount enter a dollar amount
Depreciation enter a dollar amount enter a dollar amount enter a dollar amount
Property taxes enter a dollar amount enter a dollar amount enter a dollar amount
Insurance enter a dollar amount enter a dollar amount enter a dollar amount
Purchase price enter a dollar amount enter a dollar amount enter a dollar amount
Freight and inspection enter a dollar amount enter a dollar amount enter a dollar amount
Receiving costs enter a dollar amount enter a dollar amount enter a dollar amount
   Total annual cost $enter a total amount for this column $enter a total amount for this column $enter a total amount for this column



(b) Based on your analysis, what decision should management make?

The company should select an option                                                          make CISCObuy CISCO.



(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?

select an option                                                          YesNo

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