Problem 20-02A a-c (Video)

The management of Pharoah 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 companys 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 $5.37, direct labor $4.05, indirect labor $0.41, utilities $0.37. 3. Fixed manufacturing costs applicable to the production of CISCO were:

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 $83,295. 5. If CISCO units are purchased, freight and inspection costs would be $0.35 per unit, and receiving costs totaling $1,270 per year would be incurred by the Machining Department.

Cost Item Direct Allocated Depreciation $2,000 $930 400 590 $3,400 $1,920 Property taxes Insurance 500 900 (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).) Net Income Increase Make CISCo Buy CISCO (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 (c) Would the decision be different if Pharoah Company has the opportunity to produce $3,000 of net income with the facilities currently being used to manufacture CISCO? Click if you would like to Show Work for this question: Open Show Work