Question

The management of Shatner Manufacturing Company is trying to decide whether to continue manufacturing a part...

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. 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 $5.08, direct labor $4.15, indirect labor $0.41, utilities $0.44.
3. Fixed manufacturing costs applicable to the production of CISCO were:

Cost Item Direct Allocated
Depreciation $1,900 $910
Property taxes 540 340
Insurance 920 580
$3,360 $1,830


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 7,900 CISCO units from a supplier is $79,899.
5. If CISCO units are purchased, freight and inspection costs would be $0.37 per unit, and receiving costs totaling $1,270 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 $enter direct material in dollars $enter direct material in dollars $enter direct material in dollars
Direct labor enter direct labor in dollars enter direct labor in dollars enter direct labor in dollars
Indirect labor enter indirect labor in dollars enter indirect labor in dollars enter indirect labor in dollars
Utilities enter utilities in dollars enter utilities in dollars enter utilities in dollars
Depreciation enter depreciation in dollars enter depreciation in dollars enter depreciation in dollars
Property taxes enter property taxes in dollars enter property taxes in dollars enter property taxes in dollars
Insurance enter insurance in dollars enter insurance in dollars enter insurance in dollars
Purchase price enter the purchase price in dollars enter the purchase price in dollars enter the purchase price in dollars
Freight and inspection enter freight and inspection in dollars enter freight and inspection in dollars enter freight and inspection in dollars
Receiving costs enter receiving costs in dollars enter receiving costs in dollars enter receiving costs in dollars
   Total annual cost $enter total annual cost in dollars $enter total annual cost in dollars $enter total annual cost in dollars



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

The company should select between make and buybuy CISCOmake CISCO make CISCObuy 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 Yes and NoYesNo YesNo

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Answer #1
7,900 7,900
Make Buy Net income
CISCO CISCO increase(Decrease)
5.08 Direct Material 40132 40132
4.15 Direct labor 32785 32785
0.41 Indirect labor 3239 3239
0.44 Utilities 3476 3476
Depreciation 1,900 1,900
Property taxes 540 540
insurance 920 920
purchase price 79,899 -79,899
0.37 Freight and inspection 2923 -2923
Receiving costs 1,270 -1,270
total annual cost 82992 84092 -1100
b) more cost effective to make the part
c) Make Buy Net income
CISCO CISCO increase(Decrease)
total annual cost 82992 84092 -1100
opportunity cost 3,000 0 3,000
total cost 85992 84092 1900
yes
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