The management of Borealis Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called WISCO, is a component of the company’s finished product. 

The following information was collected from the accounting records and production data for the year ended December 31, 2022:

1. The machining department produced 8,000 units of WISCO during the year. 

2. Variable manufacturing costs applicable to the production of each WISCO unit were direct materials $4.80, direct labour $4.30, indirect labour $0.43, and utilities $0.40. 

3. Fixed manufacturing costs applicable to the production of WISCO were as follows:

The company will eliminate all variable manufacturing and direct fixed costs if it purchases WISCO. Allocated costs will have to be absorbed by other production departments. So if WISCO is purchased, the fixed manufacturing costs allocated to WISCO will have to be absorbed by other production departments. 

4. The lowest quotation for 8,000 WISCO units from a supplier is $80,000. 

5. If WISCO units are purchased, freight and inspection costs would be $0.35 per unit, and the machining department would incur receiving costs totalling $1,300 per year.

Instructions 

a. Prepare an incremental analysis for WISCO. Your analysis should have columns for 

(1) Make WISCO, 

(2) Buy WISCO,

(3) Net Income Increase (Decrease). 

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

c. Would the decision be different if Borealis had the opportunity to produce $3,000 of net income with the facilities currently being used to manufacture WISCO? Show calculations. 

d. What non-financial factors should management consider in making its decision?

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Cost Item Depreciation Property taxes Insurance Direct $2,100 500 900 $3,500 Allocated $ 900 200 600 $1,700 Total $3,000 700 1,500 $5,200