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, 2022.

• 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 $4.80, direct labor $4.30, indirect labor $0.43, utilities $0.40.
• 3. Fixed manufacturing costs applicable to the production of CISCO were:

  Cost Item	Direct	Allocated
  Depreciation	$2,100	$    900
  Property taxes	500	200
  Insurance	900	600
  	$3,500	$1,700

  All variable manufacturing and direct fixed costs will be eliminated if CISCO is purchased. Allocated costs will not be eliminated if CISCO is purchased. So if CISCO is purchased, the fixed manufacturing costs allocated to CISCO will have to be absorbed by other production departments.

• 4. The lowest quotation for 8,000 CISCO units from a supplier is $80,000.
• 5. If CISCO units are purchased, freight and inspection costs would be $0.35 per unit, and receiving costs totaling $1,300 per year would be incurred by the Machining Department.

a. Prepare an incremental analysis for CISCO. Your analysis should have columns for CISCO, (2) Buy CISCO, and (3) Net Income Increase/(Decrease). (NI (decrease) $(1,160))

b. 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? Show computations.

Answer 1

a) Incremental Analysis

b) If the current facilities used for making CISCO are used for other purpose then

Increase in Income = 3000

Decrease in Net Income by buying CISCO = 1160

Net Increase in Income = 3000 - 1160 = $1840

Therefore CISCO should ne bought as it leads to increase in income by $1840