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P$7\mathrm{.}2$A $($LO $3),$ E Writing 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 $31,2020.$

$8,000$ units of CISCO were produced in the Machining Department.

Variable manufacturing costs applicable to the production of each CISCO unit were: direct materials $$4\mathrm{.}80,$ direct labor $$4\mathrm{.}30,$ indirect labor $$0\mathrm{.}43,$ utilities $$0\mathrm{.}40.$

Fixed manufacturing costs applicable to the production of CISCO were:

$\backslash$table$[[$Cost Item,Direct,Allocated$],[$Depreciation$,$$$2,100,$$ $900],[$Property taxes,$500,200],[$Insurance$,900,600],[$$$3,500,$$$1,700]]$

All variable manufacturing and direct fixed costs will be eliminated if CISCO is purchased. Allocated costs will not be eliminated if CISCO is purchased. So if CISCO is purchased, the fixed manufacturing costs allocated to CISCO will have to be absorbed by other production departments.

$4.$ The lowest quotation for $8,000$ CISCO units from a supplier is $$80,000.$

$5.$ If CISCO units are purchased, freight and inspection costs would be $$0\mathrm{.}35$ per unit, and receiving costs totaling $$1,300$ per year would be incurred by the Machining Department.

Use incremental analysis related to make or buy, consider opportunity cost, and identify nonfinancial factors.

$7-34$ CHAPTER $7$ Incremental Analysis

Instructions

a$.$ NI $($decrease$)$ $$(1,160)$

c$.$ NI increase $$1,840$

a$.$ Prepare an incremental analysis for CISCO. Your analysis should have columns for $(1)$ Make CISCO, $(2)$ 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 the opportunity to produce $$3,000$ of net income with the facilities currently being used to manufacture CISCO? Show computations.

d$.$ What nonfinancial factors should management consider in making its decision? Comment on the comparative overhead cost for the two services under both traditional costing and ABC.

P$7\mathrm{.}2$A $($LO $3),$ E Writing 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 $31,2020.$

$8,000$ units of CISCO were produced in the Machining Department.

Variable manufacturing costs applicable to the production of each CISCO unit were: direct materials $$4\mathrm{.}80,$ direct labor $$4\mathrm{.}30,$ indirect labor $$0\mathrm{.}43,$ utilities $$0\mathrm{.}40.$

Fixed manufacturing costs applicable to the production of CISCO were:

$\backslash$table$[[$Cost Item,Direct,Allocated$],[$Depreciation$,$$$2,100,$$$900$

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