Problem 7-2A (Part Level Submission) (a) Problem 7-2A (Part Level Submission) Th
ID: 2498396 • Letter: P
Question
Problem 7-2A (Part Level Submission)
(a)
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 $4.82, direct labor $4.29, indirect labor $0.44, utilities $0.43.
3. Fixed manufacturing costs applicable to the production of CISCO were:
Cost Item Direct Allocated Depreciation $2,070 $870 Property taxes 500 350 Insurance 890 580 $3,460 $1,800
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 $79,142.
5. If CISCO units are purchased, freight and inspection costs would be $0.38 per unit, and receiving costs totaling $1,270 per year would be incurred by the Machining Department.
Explanation / Answer
If company purchase the CISCO the Net Income would decrease by $ 1112, therefore company should continue manufacturing a part
Make CISCO Buy CISCO Net Income Increase (Decrease) Direct material(4.82*7900) 38078 0 38078 Direct labor (4.29*7900) 33891 0 33891 Indirect labor(0.44*7900) 3476 0 3476 Utilities(0.43*7900) 3397 0 3397 Depreciation 2070 0 2070 Property taxes 500 0 500 Insurance 890 0 890 Purchase price 0 79142 -79142 Freight and inspection (0.38*7900) 0 3002 -3002 Receiving costs 0 1270 -1270 Total annual cost 82302 83414 -1112