Question

The management of Marigold 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. 7,900 units of CISCO were produced in the Machining Department.
2. Variable manufacturing costs applicable to the production of each CISCO unit were:
    direct materials $5.11, direct labor $4.48, indirect labor $0.48, utilities $0.39.
3. Fixed manufacturing costs applicable to the production of CISCO were:

Cost Item		Direct		Allocated
Depreciation		$2,000		$900
Property taxes		540		330
Insurance		940		560
		$3,480		$1,790

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 7,900 CISCO units from a supplier is $83,151.
5. If CISCO units are purchased, freight and inspection costs would be $0.37 per unit, and receiving costs totaling $1,280 per year would be incurred by the Machining Department.

	Your answer is partially correct. Try again.

Prepare an incremental analysis for CISCO. (If amount decreases net income then enter the amount 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		$		$		$

Answer 1

	Make CISCO	Buy CISCO	Net income increase (Decrease)
Direct material (7,900 * $5.11)	40369	0	40369
Direct labor (7,900 * $4.48)	35392	0	35392
Indirect labor (7,900 * $0.48)	3792	0	3792
Utilities (7,900 * $0.39)	3081	0	3081
Depreciation	2900	900	2000
Property taxes	870	330	540
Insurance	1500	560	940
Purchase price	0	83151	-83151
Freight & inspection (7,900 * $0.37)	0	2923	-2923
Receiving cost	0	1280	-1280
Total annual cost	87904	89144	-1240

The company should make CISCO as the cost of making is less than buying.