Answer:
a)
1. Make Cisco, total cost is $74930
2. Buy Cisco, total cost is $83152
3. Net income decrease is $8222
b. Based on the above, management should continue manufacturing Cisco since the option of purchasing results in a net income decrease of $8222
C. If Shatner Company has the opportunity to produce $3,000 of net income with the facilities currently being used to manufacture CISCO, the decision will not be different because the additional income does not offset the net decrease in income.
d. Other non financial factors to be considered by management in making its decisions are:
1. The time it takes to manufacture the product.
2. The inventory of materials and work in progress
3. Difference in quality between manufactured and purchased products
4. Delay in delivery
5. Damages due to freight
Explanation:
8000 units of Cisco was produced
Variable costs:
direct materials = $5.00
Direct labor = $4.35
indirect labor = $0.40
utilities = $0.39
Total variable cost = 8000 * (5+4.35+0.4+0.39)
TVC = 8000*9.14 = $73120
Total allocated fixed cost = $1,810
Total cost = TVC + TFC
TC = 73120+1810 = $74930
If on the other hand the units are purchased, we have :
freight and inspection = $0.34 per unit
Receiving costs = $1,290 per year
Therefore total cost = 8000*(0.34) + 1290 = $1562
If the lowest quotation for 8000 units of Cisco is $81,590, therefore the total cost of purchasing the product is 81590+1562 = $83152
(a)
1. Make Cisco, total cost is $74930
2. Buy Cisco, total cost is $83152
3. Net income decrease is $8222
b. Based on the above, management should continue manufacturing Cisco since the option of purchasing results in a net income decrease of $8222
C. If Shatner Company has the opportunity to produce $3,000 of net income with the facilities currently being used to manufacture CISCO, the decision will not be different because the additional income does not offset the net decrease in income.
d. Other non financial factors to be considered by management in making its decisions are:
1. The time it takes to manufacture the product.
2. The inventory of materials and work in progress
3. Difference in quality between manufactured and purchased products
4. Delay in delivery
5. Damages due to freight
