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. Three 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 pe 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

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

produced $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?