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Incremental Analysis for a make or buy decision

Please see the attached excel spreadsheet that includes one worksheet with the problem to resolve, one worksheet with an example of what the problem should be formated or resemble and one worksheet to use for the answer. Please show the calculations.

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, 2008.

1) The Machinery department produced 36,000 units of Tropica.
2) each tropica unit requires 10 minutes to produce. Thress people in the Machinery Department work full time
(2000 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 cost directly applicable to the production of Tropica are :indirect labor 5,500, utilities 1300, depreciation 1600,
property taxes and insurance 1000. All of the costs will be eliminated if Tropica is purchased.
5) The lowest price for a tropicana 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 puchased, the excess space will be used to store Martinez finished product. Currently, Martinez rents
storage space at approximately $0.60 per unit store 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 release facilities can be used to produce $10,000 of net income in addition to the savings on the rental of storage space.
C What decision should now be made?

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Solution Summary

The solution provdes an incremental analysis for a make or buy decision for Martinez Manufacturing's Tropica.

$2.19