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Problem 12-2 The management of Ayayai Manufacturing Company is trying to decide whether to continue manufacturing a part or tPrepare an incremental analysis for CISCO. (If amount decreases net income then enter the amount using either a negative sign

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Answer #1

Incremental analysis:

Make CISCO Buy CISCO Net Income Increase (Decrease)
Direct materials (7900 x $4.50) 35550 0 35550
Direct labor (7900 x $4.00) 31600 0 31600
Indirect labor (7900 x $0.40) 3160 0 3160
Utilities (7900 x $0.35) 2765 0 2765
Depreciation ($1900 + $860) 2760 860 1900
Property taxes ($460 + $260) 720 260 460
Insurance ($860 + $560) 1420 560 860
Purchase price 0 73349 -73349
Freight and inspection (7900 x $0.34) 0 2686 -2686
Receiving costs 0 1260 -1260
Total annual cost 77975 78975 -1000

The company should make.

Buying CISCO would result in a decrease in net income of $1,000 and hence Ayayai should make CISCO.

Yes.

The opportunity cost of making $3,000 will increase the total cost of making. Thus, the decision would be buy.

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