P12-2 The management of Shatner Manufacturing Company is tryingto decide whether to continue manufacturing a part or to buy itfrom an outside supplier. The part, called CISCO, is a component ofthe company’s fi nished product The following information wascollected from the accounting records and production data for theyear ending December 31, 2017.1. 8,000 units of CISCO were producedin the Machining Department.2. Variable manufacturing costsapplicable to the production of each CISCO unit were: directmaterials $4.80, direct labor $4.30, indirect labor $0.43,utilities $0.40.All variable manufacturing and direct fixed costswill be eliminated if CISCO is pur-chased. Allocated costs willhave to be absorbed by other production departments.3. Fixedmanufacturing costs applicable to the production of CISCO were:Cost Item Direct Allocated Depreciation $2,100 $ 900 Property taxes500 200 Insurance 900 600 $3,500 $1,700 4. The lowest quotation for8,000 CISCO units from a supplier is $80,000.5. If CISCO units arepurchased, freight and inspection costs would be $0.35 per unit,and receiving costs totaling $1,300 per year would be incurred bythe Machining Department.Instructions(a) Prepare an incrementalanalysis for CISCO. Your analysis should have columns for (1) MakeCISCO, (2) Buy CISCO, and (3) Net Income Increase/(Decrease).(b)Based on your analysis, what decision should management make?(c)Would the decision be different if Shatner Company has theopportunity to produce $3,000 of net income with the facilitiescurrently being used to manufacture CISCO? Show computations.(d)What nonfi nancial factors should management consider in making itsdecision
| (a) | Refer to Illustration 12-6 as well as textbookinstructions | | | | | | | |
| | | | | | | Net Income | | | | | |
| | | | | Make | Buy | Increase | | Show work or include formulas | | | |
| | | | | CISCO | CISCO | (Decrease) | | | | | |
b
c
d
