Question

The management of Shatner Manufacturing Company is trying to decide whether to continue manufactu...

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, 2020.

1. 8,100 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 $4.89, indirect labor $0.42, utilities $0.35.
3. Fixed manufacturing costs applicable to the production of CISCO were:

Cost Item Direct Allocated
Depreciation $1,900 $930
Property taxes 470 400
Insurance 900 640
$3,270 $1,970


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 8,100 CISCO units from a supplier is $87,328.
5. If CISCO units are purchased, freight and inspection costs would be $0.38 per unit, and receiving costs totaling $1,290 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      
Direct labor
Indirect labor
Utilities
Depreciation
Property taxes
Insurance
Purchase price
Freight and inspection
Receiving costs
   Total annual cost



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

The company should  select between make and buy:

A. make CISCO

B. buy 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 between:

A. Yes

B. No   

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Answer #1
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Part a
Make CISCO Buy CISCO Net Income
Increase
For 8,100 units (Decrease)
Direct material 8,100*$5.10 $       41,310 $             -   $       41,310
Direct labor 8,100*$4.89 $       39,609 $             -   $       39,609
Indirect labor 8,100*$0.42 $         3,402 $             -   $         3,402
Utilities 8,100*$0.35 $         2,835 $             -   $         2,835
Depreciation $         2,830 $         930 $         1,900
Property taxes $             870 $         400 $            470
Insurance $         1,540 $         640 $            900
Purchase price $                -   $    87,328 $     -87,328
Freight and inspection 8,100*$0.38 $      3,078 $       -3,078
Receiving costs $      1,290 $       -1,290
    Total annual cost $       92,396 $    93,666 $       -1,270
Part b
A. Make CISCO since cost is lower by $1,270
Part c
A Yes
Loss in buying CISCO $        -1,270
Additional income (Opportunity) $         3,000
Net Advantage $         1,730
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