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Problem 7-2A (Part Level Submission)
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 $4.70, direct labor $4.87, indirect labor $0.49, utilities $0.42.
3. Fixed manufacturing costs applicable to the production of CISCO were:
Cost Item Direct Allocated
Depreciation $2,080 $920
Property taxes 530 260
Insurance 950 640
$3,560 $1,820
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 $83,593.
5. If CISCO units are purchased, freight and inspection costs would be $0.34 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 $ $ $
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