Reference no: EM132522010

Prepare incremental analysis related to a make-or-buy decision, consider opportunity cost, and identify non-financial factors.

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:

1.The machinery department produced 40,000 units of Tropica.

2.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.

3.The cost of materials per Tropica unit is $3.

4.Manufacturing costs directly applicable to the production of Tropica are as follows: indirect labour, $6,000; utilities, $1,500; depreciation, $2,000; property taxes and insurance, $2,000. All of the costs will be eliminated if the company purchases Tropica.

5.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.

6.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.

Instructions

Question a. Prepare one incremental analysis for the make-or-buy decision. Should Dunham make or buy the part? Why?

Question b. Prepare one 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?

Question c. What non-financial factors should it consider in the decision?