The management of Dunham Manufacturing Company has asked for your assistance 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, 2012:
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 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
(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?