1.

0 QUESTION: P7 – 2A

The management of Shatner Manufacturing Company is trying to decide whether to continue

manufacturing a part or to buy it from an outsider 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. 8,000 units of CISCO were produced in the Machining Department.

2. Variable manufacturing cost applicable to the production of each CISCO unit were: direct
materials $4.80, direct labour$4.30 indirect labour $0.43, utilities $0.40

3. Fixed manufacturing costs applicable to the production of CISCO were:

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Cost Item Direct Allocated

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Depreciation $ 2,100 $ 900

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Property taxes 500 200
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Insurance 900 600
$3,500 $ 1,700
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All variable manufacturing and direct fixed cost will be eliminated if CISCO is purchased.
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Allocated costs will have to be absorbed by other production departments.

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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 $0.35 per unit, and
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receiving costs totalling $1,300 per year would be incurred by the Machining
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Department.
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Instructions
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a) Prepare an incremental analysis for CISCO. Your analysis should have columns for (1)
Make CISCO, (2) Buy CICCO, 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 non-financial factors should management consider in making its decision?

https://www.coursehero.com/file/33916663/Management-accounting-Answerdocx/
 2.0 ANSWERS
a)

SHATNER MANUFACTURING COMPANY INCREMENTAL ANALYSIS

Net Income
Make CISCO Buy CISCO
Increase / (Decrease)
Direct Material 38,400 38,400
Direct Labour 34,400 34,400
Indirect Labour 3,440 3,440
Utilities 3,200 3,200
Depreciation 3,000 900 2,100
Property taxes 700 200 500

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Insurance 1,500 600 900

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Purchase Price 80,000 (80,000)

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Freight and Inspection 2,800 (2,800)

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Receiving Cost 1,300 (1,300)
Total Annual Cost rs e 84,640 85,800 (1,160)
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Computations:
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Direct Material 4.8 x 8,000 = 38,400

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Direct Labour 4.3 x 8,000 = 34,400

Indirect Labour 0.43 x 8,000 = 3,440
Utilities 0.4 x 8,000 = 3,000
Freight and Inspection 0.35 x 8,000 = 2,800
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Fixed manufacturing costs applicable to the production of CISCO:

Depreciation 2,100 (direct) + 900 (allocated) = 3,000

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Property taxes 500 (direct) + 200 (allocated) = 700

Insurance 900 (direct) + 600 (allocated) = 1,500
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*Allocated costs will have to be absorbed by other production department.

b) The management of Shatner Manufacturing Company should continue to make

CISCO instead of buying it. The reason is that the company will incur additional cost of $1,160 if
the management decide to buy the CISCO.

https://www.coursehero.com/file/33916663/Management-accounting-Answerdocx/
 c)
SHATNER MANUFACTURING COMPANY INCREMENTAL ANALYSIS
Net Income
Make CISCO Buy CISCO
Increase / (Decrease)
Total Annual Cost 84,640 85,800 (1,160)

Opportunity Cost 3,000 0 3,000

Total Cost 87,640 85,800 1,840

Computation:

Total Annual Cost + Opportunity = Total Cost

84,640 + 3,000 = 87,640

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New Net income = 87,640 – 85,800

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= 1,840 (increase)

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If Shatner Company has the opportunity to produce $3,000 of net income with the
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facilities currently being used to manufacture CISCO, yes indeed it will change the
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decision of the management since it is now advantageous to buy the CISCO as the
company will received $1,840 worth of net income by doing so.
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d) A non-financial factor to consider in making this decision include the possibility of hiring
more employees for production, or increasing labour, maintaining standards and controlling
the purchase price in the future
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Eventhough if the non-financial factor is non-financial we still need to compute the

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necessary cost in order to make decision if we will have profit or loss. Below is the
computation:
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Computations:
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Direct Labour 4.3

Indirect Labour 0.43
Total cost of labor 4.73

If

https://www.coursehero.com/file/33916663/Management-accounting-Answerdocx/

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