Problem 7-2 (Part Level Submission) The management of Grouper Manufacturing Comp

ID: 2557479 • Letter: P

Question

Problem 7-2 (Part Level Submission) The management of Grouper 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, 2017 1. 8,100 units of cIscO were produced in the Machining Department. 2. Variable manufacturing costs applicable to the production of each CISCO unit were: direct materials $4.51, direct labor $4.74, indirect labor $0.42, utilities $0.37. 3. Fixed manufacturing costs applicable to the production of CISCO were: Cost Item Direct Allocated Depreciation $2,100 $940 Property taxes 00 390 Insurance 940 590 $3,540 $1,920 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 8,100 CISCO units from a supplier is $81,698 5. If CISCO units are purchased, freight and inspection costs would be $0.36 per unit, and receiving costs totaling $1,300 per year would be incurred by the Machining Department.

Explanation / Answer

Answer:

Prepare an incremental analysis for CISCO

Make

Buy

Net Income Increase/Decrease

Direct Material (8,100*4.51)

36,531

Direct Labor (8,100*4.74)

38,394

Indirect Labor (8,100*0.42)

3,402

Utilities (8,100*0.37)

2,997

Depreciation (2,100+940)

3,040

2100

940

Property Taxes (500 + 390)

890

500

390

Insurance (940+590)

1,530

940

590

Purchase Price

81,698

-81,698

Freight and Inspection (8,100*0.36)

2,916

-2,916

Receiving Costs

1,300

-1,300

Total Annual Cost

$86,784

$89,454

($2,670)

As we can see from the above table that net income is decreased by $2670 due to buying option

So management should make the product