Reference no: EM132408467

Question

The management of Marigold 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. 7,900 units of CISCO were produced in the Machining Department.

2. Variable manufacturing costs applicable to the production of each CISCO unit were: direct materials $5.11, direct labor $4.48, indirect labor $0.48, utilities $0.39.

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

Cost Item

Direct

Allocated

Depreciation $2,000  $900

Property taxes 540 330

Insurance 940 560

$3,480  $1,790

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 7,900 CISCO units from a supplier is $83,151.

5. If CISCO units are purchased, freight and inspection costs would be $0.37 per unit, and receiving costs totaling $1,280 per year would be incurred by the Machining Department.

Prepare an incremental analysis for CISCO.