Question

s related P7.49B (LO 2, 3) The management of Dunham Manufacturing Company has asked for your help in deciding whether to continue manufacturing a part Tropica, is a component of Dunham's finished product. onsider or to buy it from an outside supplier. The part, called y 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. Prob 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 a $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. as follows: indirect labour, 5. The lowest price for Tropica from an outside supplier is $6 per unit. Freight charges would be S0.50 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 fin- ished 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 buy the a. NI decrea incremental analysis for the make-or-buy decision. Should Dunham make or a. Prepare part? Why? an b. NI decrea b. Prepare produce $15.000 of net income in addition to the savings on the rental of storage space, What deci- an incremental analysis, assuming the released facilities (freed-up space) can be used to sion should the company make now? c. What non-financial factors should it consider in the decision? Determine w sehold Products Co. is a diversified household-cleaner processing ducts from a common set of chemical com- be sold or p

Answer 1

a.

	Make	Buy	Increase (Decrease) in Net Income
Direct materials (40000 x $3)	120000	0	120000
Direct labor (2500 x 3 x $15)	112500	0	112500
Manufacturing costs	11500	0	11500
Purchase price (40000 x $6)	0	240000	-240000
Freight charges (40000 x $0.50)	0	20000	-20000
Part-time receiving clerk	0	10000	-10000
Rent of storage space (10000 x $1.50)	15000	0	15000
Total $	259000	270000	-11000

Dunham should make the part since buying the part will result in a decrease in net income of $11000.

b.

	Make	Buy	Increase (Decrease) in Net Income
Direct materials (40000 x $3)	120000	0	120000
Direct labor (2500 x 3 x $15)	112500	0	112500
Manufacturing costs	11500	0	11500
Purchase price (40000 x $6)	0	240000	-240000
Freight charges (40000 x $0.50)	0	20000	-20000
Part-time receiving clerk	0	10000	-10000
Rent of storage space (10000 x $1.50)	15000	0	15000
Opportunity cost	15000	0	15000
Total $	274000	270000	4000

The company should buy the part since it would result in an increase in net income of $4000.

c. The non-financial factors that Dunham should consider prior to making the decision are the quality of the part supplied by the outside supplier, the delivery schedule of the supplier to match the production requirements of Dunham, socio-economic factors like the employability of the employees that will get freed when manufacture of the part is stopped.