The management of Zhou Manufacturing 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, 2020.

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 HK$48.00, direct labor HK$43.00, indirect labor HK$4.30, utilities HK$4.00.

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

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 HK$800,000.

5. If CISCO units are purchased, freight and inspection costs would be HK$3.50 per unit, and receiving costs totaling HK$13,000 per year would be incurred by the Machining Department. 

Instructions

a. Prepare an incremental analysis for CISCO. Your analysis should have columns for (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 diff erent if Zhou Company has the opportunity to produce HK$30,000 of net income with the facilities currently being used to manufacture CISCO? Show computations.

d. What non-fi nancial factors should management consider in making its decision?

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Direct Cost Item Allocated Depreciation Property taxes HK$21,000 5,000 9,000 HK$ 9,000 2,000 Insurance 6,000 HK$35,000 HK$17,000