Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment
ID: 2454551 • 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 $42 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:
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.)
Total Relevant Cost (14,100 units)
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 $157,460 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)
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 $42 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:
Direct Materials $13 $183,300 Direct Labor 15 211,500 Variable manufacturing overhead 1 14,100 Fixed manufacturing overhead, traceable 6 84,600 Fixed manufacturing overhead, allocated 17 239,700 Total cost 52 733,200 *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.)
Make Buy
Total Relevant Cost (14,100 units)
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 $157,460 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)
Make Buy Total Relevant Cost (14,100 Units)Explanation / Answer
1a)
total number of carburator produced = total direct material cost / unit material cost = $183300 / $13 = 14100 units
Cost of buying the carburator = 14100 * 42 = $592200
Total relevant Cost of making = $442740
Tital Relevant cost of buying = $ 592200
2a)
Total Relevant cost of making the product = $ 442740
Total Relevant cost of buying
= $592200 - Additional contribution earned by using the released capacity
= $592200 - $157460
= $434740
Relevant cost items per unit total direct material $13 183300 direct labour $15 211500 Variable Manufacturing overhead $1 14100 Total Varable cost of production $29 408900 Traccable Fixed manufacturing Overhead 33840 note 1 Total Relevant cost of making carburator 442740 Note 1: The special equipment has no resale value and has no alternative use hence the depreciation on special equipment is a part of sunk cost which has to be incurred even if the company does not produce the carburator. The depreciation portion of the traceable fixed cost is irrelevant for decision 40% of 84600 = $33840 being the supervisor's salary is relevant cost which would be avoided if the carburator is purchased from outsideRelated Questions
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