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 $23 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       15,000 Units Per Year

Direct materials $ 5      $ 75,000

Direct labor 7 105,000

Variable manufacturing overhead 3 45,000

Fixed manufacturing overhead, traceable 9* 135,000

Fixed manufacturing overhead, allocated 9 135,000

Total cost $ 33 $ 495,000

*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 $78,000 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 $23 per unit? Reject Accept

Explanation / Answer

Assuming that the company has no alternative use for the facilities that are now being used to produce the carburetors, then we have to decide whether to produce carburetors on the basis of contribution/saving towards the Fixed manufacturing overhead. The total cost of making and buying the parts and the resultant contribution/saving is as follows:

(1a) There is a contribution/Saving of $ 8 towards the Fixed Manufacturing Overheads on the producing he carburetors, So Troy Engines, Ltd. should decide to produce instead of buying from outside supplier.

(1b) No, the outside supplier's offer should not be accepted and decide to produce the carburetors as there is a Contribution / Saving of $8 towards the Fixed Manufacturing Overhead.

(2a) Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product, then there is a segment margin of the new product would be $78,000 per year i.e. Saving of $ 5.2 towards the Fixed Manufacturing Overhead on buying the parts of carburetors. The total cost of making and buying the parts:

There is a contribution/Saving of $ 2.80 towards the Fixed Manufacturing Overheads on the producing the parts of carburetors even though new launch contributes $5.20 towards Fixed Overheads.

(2b) Troy Engines, Ltd., should reject the offer to buy the carburetors for $23 per unit as still, there is a contribution of $ 2.80 towards Fixed Manufacturing Overhead, so the Company continue producing the parts of carburetors.

Particulars Per Unit Cost Per 15000 units cost Cost for Decision making to buy per unit Direct Material $ 5 $ 75000 $ 5 Direct Labour 7 105000 7 Variable Manufacturing Overhead 3 45000 3 Fixed Manufacturing Overhead (traceble) 9 135000 - Fixed Manufacturing Overhead (allocable) 9 135000 - Total 33 495000 15 Offer Price to buy the carburetors 23 23 Contribution - 10 $ 8

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