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 $5.30, direct labor $4.25, 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		$930
Property taxes		500		410
Insurance		950		600
		$3,450		$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 $83,660.
5. If CISCO units are purchased, freight and inspection costs would be $0.37 per unit, and receiving costs totaling $1,260 per year would be incurred by the Machining Department.

(a) Prepare an incremental analysis for CISCO.

Answer 1

Preparation of the Incremental Analysis for CISCO
	Make CISCO	Buy CISCO	Net Income Increase / (Decrease)
Direct Material ( 8,000 units x $ 5.30)	42,400	$ 0	42,400
Direct Labor (   8,000 units x $ 4.25 )	34,000	$ 0	34,000
Indirect Labor ( 8,000 units x $ 0.45 )	3,600	$ 0	3,600
Utilities ( 8,000 units x $ 0.38 )	3,040	$ 0	3,040
Depreciation ($ 2,000 + $ 930)	2,930	930	2,000
Property Taxes ($ 500 + $ 410)	910	410	500
Insurance ($ 950 + $ 600)	1,550	600	950
Purchase Price	0	83,660	-83,660
Freight and Inspection ( 8,000 units x $ 0.37 )	0	2,960	-2,960
Receiving Costs	0	1,260	-1,260
Total Annual Cost	88,430	89820	-1,390