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Incremental analysis for Borealis Manufaturing

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, 2008.
1. 7,000 units of WISCO were produced in the Machining Department.

2. Variable manufacturing costs applicable to the production of each WISCO unit were: direct materials $4.80, direct labor $4.30, indirect labor $0.43, utilities $0.40.

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

Cost Item Direct Allocated
Depreciation $2,100 $ 900
Property taxes 500 200
Insurance 900 600
$3,500 $1,700

All variable manufacturing and direct fixed costs will be eliminated if WISCO is purchased. Allocated costs will have to be absorbed by other production departments.

4. The lowest quotation for 7,000 WISCO units from a supplier is $70,000.

5. If WISCO units are purchased, freight and inspection costs would be $0.40 per unit, and receiving costs totaling $1,250 per year would be incurred by the Machining Department.

Hint:
Make incremental analysis related to make or buy, consider opportunity cost, and identify nonfinancial factors.

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 Company has the opportunity to produce $5,000 of net income with the facilities currently being used to manufacture WISCO? Show computations.

(d) What nonfinancial factors should management consider in making its decision?

Solution Summary

The solution explains how to do an incremental analysis for a make or buy decision

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