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 37,440 units of Tropica. | |
| 2. | Each Tropica unit requires 10 minutes to produce. Three people in the Machinery Department work full time (2,080 hours per year) producing Tropica. Each person is paid $11.00 per hour. | |
| 3. | The cost of materials per Tropica unit is $1.50. | |
| 4. | Manufacturing costs directly applicable to the production of Tropica are: indirect labor, $4,650; utilities, $1,220; depreciation, $1,430; property taxes and insurance, $1,230. All of the costs will be eliminated if Tropica is purchased. | |
| 5. | The lowest price for a Tropica from an outside supplier is $5.00 per unit. Freight charges will be $0.30 per unit, and a part time receiving clerk at $8,000 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 $0.90 per unit stored per year. Approximately 5,200 units per year are stored in the rented space. |
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