The management of Finnigan Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it
The management of Finnigan Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called BIZBE, 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, 2010.
1. 6,000 units of BIZBE were produced in the Machining Department.
2. Variable manufacturing costs applicable to the production of each BIZBE unit were: direct materials $4.75, direct labor $4.60, indirect labor $0.45, utilities $0.35.
3. Fixed manufacturing costs applicable to the production of BIZBE were:
All variable manufacturing and direct fixed costs will be eliminated if BIZBE is purchased.
Allocated costs will have to be absorbed by other production departments.
4. The lowest quotation for 6,000 BIZBE units from a supplier is $66,000.
5. If BIZBE units are purchased, freight and inspection costs would be $0.30 per unit, and receiving costs totaling $750 per year would be incurred by the Machining Department.
(a) Prepare an incremental analysis for BIZBE. Your analysis should have columns for
(1) Make BIZBE,
(2) Buy BIZBE, and
(3) Net Income Increase/Decrease.
(b) Based on your analysis, what decision should management make?
(c) Would the decision be different if Finnegan Company has the opportunity to produce $6,000 of net income with the facilities currently being used to manufacture BIZBE? Show computations.
(d) What nonfinancial factors should management consider in making its decision?
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