Question

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 $4.58, direct labor $4.51, indirect labor $0.45, utilities $0.41.
3. Fixed manufacturing costs applicable to the production of CISCO were:
Cost Item Direct Allocated
Depreciation $1,900 $860
Property taxes 530 320
Insurance 870 610 $3,
300 $1,790
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 $63,200.5. If CISCO units are purchased, freight and inspection costs would be $0.60 per unit, and receiving costs totaling $1,270 per year would be incurred by the Machining Department.Required:a) Prepare an incremental analysis for CISCO.

Answer 1

Answer:

Financial advantage of purchasing Cisco from outside vendor = $9,440

Explanation:

7,900 units produced

variable costs allocated to Cisco units (avoidable):

• direct materials $4.58 per unit
• direct labor $4.51 per unit
• indirect labor $0.45 per unit
• utilities $0.41 per unit
• total $9.95 x 7,900 units = $78,650

fixed manufacturing costs allocated to Cisco:

• depreciation $860
• property taxes $320
• Insurance $610
• total $1,790

an outside supplier can provide Cisco for $63,200 plus:

• freight and inspection costs $0.60 per unit x $7,900 = $4,740
• total receiving costs $1,270
• total $6,010

                             Incremental Analysis

                                         Produce       Purchase       Difference

                                          Cisco           Cisco             amount

Variable production        $78,650                              $78,650

costs

Purchase price                                       $63,200       ($63,200)

Additional expenses                              $6,010           ($6,010)

Financial advantage of purchasing Cisco                   $9,440

Allocated fixed costs are not included in this analysis since they cannot be avoided by either action, producing or purchasing.