Question

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.

The following information was collected from the accounting records and production data

Image for The management of Shatner Manufacturing Company is trying to decide whether to continue manufacturing a part o
1.

8,000 units of CISCO were produced in the Machining Department.
2.

Variable manufacturing costs applicable to the production of each CISCO unit were: direct materials $4.80, direct labor $4.30, indirect labor $0.43, utilities $0.40.
3.

Fixed manufacturing costs applicable to the production of CISCO were:
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 have to be absorbed by other production departments.
4.

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

Answer 1

Making the part is more costly than purchasing from an outside supplier.

The company should discontinued the production and purchase from a third party.

Step-by-step explanation:

Variable cost:

Direct materials $ 4.80

Direct labor $ 4.30

Indirect labor $ 0.43

Utilities $ 0.40

Total Variable: $ 9.93

Total variable cost: 9.93 x 8,000 = 79,440

Avoidable fixed manufacturing cost:

depreciation 2,100 + property taxes 500 + insurance 900 = 3,500

Unavoidable cost:

depreciation 900 + property taxes 200 + insurance 600 = 1,500

The unvoidable cost are sunk cost. We should compare with the variable and avoidable cost:

Buy option: 80,000

Make option: 79,440 + 3,500 = 82,940

Differencial outcome: (2,940)

Making the part is more costly than purchasing from an outside supplier.

The company should discontinued the production and purchase from a third party.