Managerial Accounting: Tools for Business Decision Making
7th Edition
ISBN: 9781118334331
Author: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso
Publisher: WILEY
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Textbook Question
Chapter 7, Problem 7.2AP
Use incremental analysis related to make or buy. consider opportunity cost, and identify nonfinancial factors.
(LO 3), E
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, 2017.
1. 8,000 units of CISCO were produced in the Machining Department.
2. Variable manufacturing coats applicable to the production of each CISCO unit were: direct materials $4.80, direct labor $4.30, indirect tabor $0.43, utilities $0.40.
3. Fixed
| Cost Item | Direct | Allocated |
| Depreciation | $2.100 | $ 900 |
| Property taxes | 500 | 200 |
| Insurance | 900 | 600 |
| $3.500 | $1.700 |
All variable manufactures and direct fixed costs will be eliminated if CISCO is purchased. Allocated costs will have to be absorbed by other production departments.
1. The lowest quotation for 8,000 CISCO units from a supplier is $80,000.
2. If CISCO units are purchased, freight and inspection costs would be $0.35 per unit, and receiving costs touting $1,300 per year would be incurred by the Machining Department.
Instructions
(a) Prepare an incremental analysis for CISCO. Your analysis should have columns tor (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.
(a) ________ What nonfinancial factors should management consider in making its decision?
(a) NI (decrease) $(1.160)
(c) NI increase $1,840
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Assume you are the department B manager for Marley's Manufacturing. Marley's operates under a cost-based transfer structure. Assume you receive the majority of your raw materials from department A, which sells only to department B (they have no outside sales). After calculating the operating income in dollars and operating income in percentage, analyze the following financial information to determine costs that may need further investigation.
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Assume you are the department B manager for Marley's Manufacturing. Marley's operates under a cost-based transfer structure. Assume you receive the majority of your raw materials from department A, which sells only to department B (they have no outside sales). After calculating the operating income in dollars and operating income in percentage, analyze the following financial information to determine costs that may need further investigation.
Marley's ManufacturingIncome StatementMonth Ending August 31, 2018
Assume you are the department B manager for Marley's Manufacturing. Marley's operates
under a cost-based transfer structure. Assume you receive the majority of your raw materials
from department A, which sells only to department B (they have no outside sales). After
calculating the operating income in dollars and operating income in percentage, analyze the
following financial information to determine costs that may need further investigation.
Marley's Manufacturing
Income Statement
Month Ending August 31, 2018
Dept. A
Dept. B
Sales
$22,000
$52,000
Cost of goods sold
10,780
27,040
Gross profit
$11,220
$24,960
Expenses:
Utility expenses
$880
$3,640
Wages expense
5,280
10,920
Costs allocated from corporate
1,980
14,560
Total expenses
$8,140
$29,120
Operating income/(loss) in dollars
$
$
Operating income/(loss) in percentage
%
Department B had an operating loss.
Department A had an operating loss.
Department B has a higher wage percent of sales.
Department A receives a higher percent…
Chapter 7 Solutions
Managerial Accounting: Tools for Business Decision Making
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