Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment

Question

Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $31 per unit To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally 15,200 Units Per Unit Per Year Direct matenals Direct labor Variable manufacturing averhead Fixed manufactuning overhead, traceable Fixed manufacturing overhead, allocated Total cost 5 136,800 67.200 30 400 91,200 6 S 41 S 623,200 40% supervisory salanes: 60% depreciation of special equipment (no resale value). Required: 1a. Assuming that the company has no alternative use for the facilities that are now being used to produce the carburetors, compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 Make Total relevant cost (15,200 units) 471,200 15. Should the outside supplier's offer be accepted? Reject Accept 2a. Suppase that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be S110,320 per year. Compute the total cost of making and buying the parts. Round your Fixed manufacturing overhead per unit rate to 2 decimals.) Make Total relevant cost (15,200 units) 20 Should Troy Engines, Ltd., accept the ofmer to buy the carburetors for 531 per unit? Accept

Explanation / Answer

1 Per unit Total Make Buy Make Buy Direct materials 9 136800 Direct labor 11 167200 Variable manufacturing overhead 2 30400 Fixed manufacturing overhead traceable 2.4 36480 Purchase cost 31 471200 Total 370880 471200 Make Buy Total relevant cost 370880 471200 1b Reject 2a Make Buy Total cost 370880 471200 Opportunity cost 110320 Total relevant cost 481200 471200 2b Accept

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