The management of Peterson Manufacturing Company has asked for your assistance i
ID: 2503558 • Letter: T
Question
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.
Make Tropica Buy Tropica Net Income (Decrease)
Total Annual Cost
Opportunity Cost
Total Cost
Thank you in advance to anyone who can help me, I am having trouble with this one.
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.Explanation / Answer
Question:
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, 2012.
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 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.
Ans.
The company should Tropica.
Make Tropica Buy Tropica Net Income Increase (Decrease)
Direct material $72,000* $ 0 $ 72,000
Direct labor 66,000** 0 66,000
Manufacturing costs
Indirect labor 5,500 0 5,500
Utilities 1,300 0 1,300
Depreciation 1,600 0 1,600
Property taxes $ insurance 1,000 0 1,000
Cost of goods purchased 0 1,40,400*** (140,400)
Receiving 0 8,500 (8,500)
Freight 0 10,800**** (10,800)
Storage 3,600 0 3,600
Total annual cost $151,000 $159,700 $(8,700)
*(36,000 x $2.00)
*(2,000 x 3 x $11.00)
***(36,000 x $3.90)
****(36,000 x $.30)
*****(6,000 x $.60)
(b) Based on your analysis, what decision should management make?
It is more cost effective to continue to make the part because the cost to make the part and rent storage space is $151.000, but the cost to buy the part and use the space for storage is $159,700. Making the part results in an annual cost savings of $8,700.
(c) Complete the analysis below to determine if the decision would be different if Martinez Manufacturing Company has the opportunity to produce $10,000 of net income with the facilities currently being used to manufacture Tropica?
Make Tropica buy Tropica Net Income Increase (Decrease)
Total annual cost $151,000 $159,700 $(8,700)
Opportunity cost 10,000 0 10,000
Total cost $161,000 $159,700 $1,300
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