The management of Peterson 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 Peterson'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 36,800 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 $11.28 per hour. |
| 3. |
The cost of materials per Tropica unit is $2.07. |
| 4. |
Manufacturing costs directly applicable to the production of Tropica are: indirect labor, $5,445; utilities, $1,373; depreciation, $1,539; property taxes and insurance, $1,073. All of the costs will be eliminated if Tropica is purchased. |
| 5. |
The lowest price for a Tropica from an outside supplier is $3.88 per unit. Freight charges will be $0.37 per unit, and a part-time receiving clerk at $7,579 per year will be required. |
| 6. |
If Tropica is purchased, the excess space will be used to store Peterson's finished product. Currently, Peterson rents storage space at approximately $0.61 per unit stored per year. Approximately 6,100 units per year are stored in the rented space.
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| (a) |
Complete the incremental analysis for Tropica. (If an amount is blank enter 0, all boxes must be filled to be correct. If the impact on net income is a decrease use either a negative sign preceding the amount, e.g. -45 or parenthesis, e.g. (45).
Make Tropica Buy Tropica Net Income (Decrease)
Direct Materials
Direct Labor
Manufacturing Costs
Indirect Labor
Utilities
Depreciation
Property Taxes & Insurance
Cost of Goods Purchased
Recieving
Freight
Storage
Total Anual Cost
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| (b) |
Based on your analysis, what decision should management make? |
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Should the company Buy or Make Tropica? |
| (c) |
Complete the analysis below to determine if the decision would be different if Peterson Manufacturing Company has the opportunity to produce $10,462 of net income with the facilities currently being used to manufacture Tropica? |
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Should the company Buy or Make Tropica? |
Make Tropica Buy Tropica Net Income (Decrease)
Total Annual Cost
Opportunity Cost
Total Cost