Reference no: EM132565514

1. The management of a computer company is trying to decide whether to continue manufacturing a part or to buy it from a vendor. The following information was collected from the accounting records and production data for the year ending December 31, 2019. 1. 7,900 units of the part were produced in the Machining Department.

2. Variable manufacturing costs applicable to the production of each part were: direct materials $4.57, direct labor $4.22, indirect labor $0.46, utilities $0.43.

3. Fixed manufacturing costs applicable to the production of the part were: Cost Item

                                           Direct                          Indirect

Depreciation                   $2,100                     $910

Property taxes                     560                     370

Insurance                             910                      580

                                    $3,570                      $1,860

All variable manufacturing and direct fixed costs would be eliminated if the part is purchased. Indirect costs would still have to be absorbed by other departments.

4. The lowest quotation for the purchase of 7,900 parts from a supplier is $77,160.

5. If the parts are purchased, freight and inspection costs would be $0.38 per unit, and receiving costs totaling $1,270 per year would be incurred by the Machining Department.

Required:

Question a) Make an incremental analysis to assist with the decision to make or buy the part and comment on the decision that management should make.

Question b) Would the decision change if there was an opportunity to make an additional $3,000 in net income by freeing up some manufacturing capacity if the company were to purchase the parts? Show how this would impact the decision