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 $24 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.)

    

      

    

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 $75,680 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

   

      

Should Troy Engines, Ltd., accept the offer to buy the carburetors for $24 per unit?

Garrison 15e Recheck 2014-12-31

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 $24 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:

Explanation / Answer

Troy Engines, Ltd. own cost of producing the carburetor internally:

    

For the decision whether make or buy, the Fixed manufacturing overhead will be ignored as they have been already incurred, so not relevant cost.

1a. Total Cost of Making = $16 * 14700 units = $235200

Total Cost of Buying = $24 * 14700 units = $352800

1b. So, rejects the outsiders offer to sell @ $24 as buying cost is more.

2a. Total cost of Making = $16 * 14700 = $235200

Total cost of Buying = $ 24 * 14700 = $352800 -  new product margin i.e. $75,680 = $277120

2b.   Should Troy Engines, Ltd., reject the offer to buy the carburetors for $24 per unit and make the parts as making

cost is less than buying.

Per Unit 14,700 Units
Per Year   Direct materials $ 5    $ 73,500     Direct labor 7    102,900     Variable manufacturing overhead 4    58,800   Fixed manufacturing overhead, traceable 9*   132,300     Fixed manufacturing overhead, allocated 9    132,300   Total cost $ 34    $ 499,800

For the decision whether make or buy, the Fixed manufacturing overhead will be ignored as they have been already incurred, so not relevant cost.

1a. Total Cost of Making = $16 * 14700 units = $235200

Total Cost of Buying = $24 * 14700 units = $352800

1b. So, rejects the outsiders offer to sell @ $24 as buying cost is more.

2a. Total cost of Making = $16 * 14700 = $235200

Total cost of Buying = $ 24 * 14700 = $352800 -  new product margin i.e. $75,680 = $277120

2b.   Should Troy Engines, Ltd., reject the offer to buy the carburetors for $24 per unit and make the parts as making

cost is less than buying.

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