The management of Borealis Manufacturing Company is trying to decide whether to continue manufacturing a part or

Question:

The management of Borealis Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called WISCO, 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, 2012:

1. The machining department produced 6,000 units of WISCO during the year.

2. Variable manufacturing costs applicable to the production of each WISCO unit were direct materials $5.00, direct labour $4.60, indirect labour $0.40, and utilities $0.30.

3. Fixed manufacturing costs applicable to the production of WISCO were as follows:

Cost Item _____________ Direct ____________ Allocated

Depreciation ................ $1,100 ........................ $ 900

Property taxes ................ 500 ............................ 200

Insurance ..................... 900 ............................ 600

............................... $2,500 ........................ $1,700

The company will eliminate all variable manufacturing and direct fixed costs if it purchases WISCO. Allocated costs will have to be absorbed by other production departments.

4. The lowest quotation for 6,000 WISCO units from a supplier is $66,000.

5. If WISCO units are purchased, freight and inspection costs would be $0.30 per unit, and the machining department would incur receiving costs totaling $500 per year.

Instructions

(a) Prepare an incremental analysis for WISCO. Your analysis should have columns for (1) Make WISCO, (2) Buy WISCO, and (3) Net income increase (decrease).

(b) Based on your analysis, what decision should management make?

(c) Would the decision be different if Borealis has the opportunity to produce $6,000 of net income with the facilities currently being used to manufacture WISCO? Show calculations.

(d) What non-financial factors should management consider in making its decision?

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Related Book For  book-img-for-question

Managerial Accounting Tools for Business Decision Making

ISBN: 978-1118033890

3rd Canadian edition

Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso, Ibrahim M. Aly

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