The management of Martinez 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 Martinez’s finished product.

An analysis of the accounting records and the production data revealed the following information for the year ending December 31, 2010.

1. The Machinery Department produced 36,000 units of Tropica.

2. Each Tropica unit requires 10 minutes to produce. Three people in the Machinery

Department work full time (2,000 hours per year) producing Tropica. Each person is paid $11.00 per hour.

3. The cost of materials per Tropica unit is $2.00.

4. Manufacturing overhead costs directly applicable to the production of Tropica are: indirect labor, $5,500; utilities, $1,300; depreciation, $1,600; property taxes and insurance, $1,000. All of the costs will be eliminated if Tropica is purchased.

5. The lowest price for a Tropica from an outside supplier is $3.90 per unit. Freight charges will be $0.30 per unit, and a part-time receiving clerk at $8,500 per year will be required.

6. If Tropica is purchased, the excess space will be used to store Martinez’s finished product. Currently, Martinez rents storage space at approximately $0.60 per unit stored per year. Approximately 6,000 units per year are stored in the rented space.

Instructions

(a) Prepare an incremental analysis for the make-or-buy decision. Should Martinez make or buy the part? Why?

(b) Prepare an incremental analysis, assuming the released facilities can be used to produce $10,000 of net income in addition to the savings on the rental of storage space. What decision should now be made?

(c) What nonfinancial factors should be considered in the decision?