Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment
ID: 2412336 • Letter: T
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 $34 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: Per Unit 15,300 Units Per Year Direct materials $ 9 $ 137,700 Direct labor 11 168,300 Variable manufacturing overhead 2 30,600 Fixed manufacturing overhead, traceable 9* 137,700 Fixed manufacturing overhead, allocated 13 198,900 Total cost $ 44 $ 673,200 *40% supervisory salaries; 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 decimals.)1b. Should the outside supplier’s offer be accepted? Reject Accept 2a. Suppose 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 $146,520 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)
2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $34 per unit? Accept Reject
iPad? 9:26 PM 68% HW5 (Ch. 7 instructions help Question 2 (of 10) Save &Exit; Sutomit 1.00 points 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 $34 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the 15,300 Units Per Unit Per Year Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost 137.700 168.300 13 S 44 137.700 198.900 S 673.200 "40% supervisory salaries: 60% depreciation of special oqugment (no resale value). Required: a. Assuming that the company has no altemative use for the facilises 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 decimals Total relevant cost (15,300 units) 1b. Should the outside supplier's offer be accepted? Reject Accept 2a. Suppose 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 $146.520 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 (15.300 units) 2b. Should Troy Engines, Ltd accept the oftler to buy the carburetors for $34 per unit? Accept O Reject HintsReferences eBook &Resources;
Explanation / Answer
1a.
Only the costs which are avoidable become relevant and should be considered for decision making.
Making cost = Direct material + Direct labor + Variable overhead + Traceable fixed cost
= 137,700 + 168,300 + 30,600 + 137,700
= $474,300
Buying cost = Offer price × Number of units
= $34 × 15,300
= $520,200
1b.
Answer: Reject
The offer should be rejected, since the buying cost is higher than making.
2a.
The margin reduces buying cost, the new buying cost is ($520,200 - $146,520 =) $373,680.
Making cost = $474,300
Buying cost = $373,680
2b.
Answer: Accept
The offer should be accepted, since the buying cost is lower than making.
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