The management of Gill Corporation is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called FIZBE, 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, 2014.

1.5,000 units of FIZBE were produced in the Machining Department.

2.Variable manufacturing costs applicable to the production of each FIZBE 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 FIZBE were:

Cost Item

Direct

Allocated

Depreciation

$1,100

$ 900

Property taxes

500

200

Insurance

900

600

$2,500

$1,700

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

4.The lowest quotation for 5,000 FIZBE units from a supplier is $56,000.

5.If FIZBE units are purchased, freight and inspection costs would be $0.30 per unit, and receiving costs totaling $500 per year would be incurred by the Machining Department.

Instructions

(a)Prepare an incremental analysis for FIZBE. Your analysis should have columns for (1) Make FIZBE, (2) Buy FIZBE, and (3) Net Income Increase/(Decrease).

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

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

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

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