Problem 20-2A

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, 2014.

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 $4.63, direct labor $4.44, indirect labor $0.42, utilities $0.43.

3. Fixed manufacturing costs applicable to the production of CISCO were:

Cost Item Direct Allocated

Depreciation $2,020 $910

Property taxes 470 290

Insurance 940 660

$3,430 $1,860

All variable manufacturing and direct fixed costs will be eliminated if CISCO is purchased. Allocated costs will have to be absorbed by other production departments.

4. The lowest quotation for 7,900 CISCO units from a supplier is $78,884.

5. If CISCO units are purchased, freight and inspection costs would be $0.37 per unit, and receiving costs totaling $1,300 per year would be incurred by the Machining Department.

Prepare 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 $ $ $

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Based on your analysis, what decision should management make?

The company should continue tomake or buy CISCO.

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Would the decision be different if Shatner Company has the opportunity to produce $5,170 of net income with the facilities currently being used to manufacture CISCO?

Yes

No

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