Problem 7-2A (Part Level Submission) (a) Problem 7-2A (Part Level Submission) Th
ID: 2778368 • 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 $4.55, direct labor $4.72, indirect labor $0.44, utilities $0.42.
3. Fixed manufacturing costs applicable to the production of CISCO were:
Cost Item Direct Allocated Depreciation $1,920 $950 Property taxes 530 430 Insurance 880 650 $3,330 $2,030
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 $80,022.
5. If CISCO units are purchased, freight and inspection costs would be $0.39 per unit, and receiving costs totaling $1,270 per year would be incurred by the Machining Department.
Explanation / Answer
(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 35945 0 35945 Direct labor 37288 0 37288 Indirect labor 2156 0 2156 Utilities 2058 0 2058 Depreciation 2870 950 1920 Property taxes 960 430 530 Insurance 1530 650 880 Purchase price 0 80022 -80022 Freight and inspection 0 3081 -3081 Receiving costs 0 1270 -1270 Total annual cost 82807 86403 -3596