Reference no: EM133017131
Question - The management of Dunham Manufacturing Company has asked for your help in deciding whether to continue manufacturing a part or to buy it from an outside supplier. The part, called Tropica, is a component of Dunham's finished product.
An analysis of the accounting records and the production data revealed the following information for the year ending December 31, 2020:
-The machinery department produced 40,000 units of Tropica.
-Each Tropica unit requires 15 minutes to produce. Four people in the machinery department work full-time (2,500 hours per year each) producing Tropica. Each person is paid $15 per hour.
-The cost of materials per Tropica unit is $3.
-Manufacturing costs directly applicable to the production of Tropica are as follows: indirect labour = $6,000; utilities = $1,500; depreciation = $2000; property taxes and insurance = $2,000. All of the costs will be eliminated if the company purchases Tropica.
-The lowest price for Tropica from an outside supplier is $6 per unit. Freight charges would be $0.50 per unit, and the company would require a part-time receiving clerk at $10,000 per year.
-If it purchases Tropica, Dunham will use the excess space that becomes available to store its finished product. Currently, Dunham rents storage space at approximately $1.50 per unit stored per year. It stores approximately 6,000 units per year in the rented space.
Required -
a. Prepare an incremental analysis for the make-or-buy decision. Should Dunham make or buy the part? Why?
b. Prepare an incremental analysis, assuming the released facilities (freed-up space) can be used to produce $15,000 of net income in addition to the savings on the rental of storage space. What decision should the company make now?
c. What non-financial factors should it consider in the decision?