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 $21 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 $56,220 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 $21 per unit?

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 $21 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

1.a) Relevent cost of 14,700 unit

    Direct material      5

    Direct labour            7

   Variable manufacturing OH          4

Supervision charges (6*.4)             2.40

Total cost per unit                      18.40

Since depreciation and allocated manufacturing overheads will incured even if we purchase it from outside. They are fixed cost which will not change as per our make or buy decision so they are irrelevent cost.

Total relevent cost for 14,700 unit (14,700 * 18.40 )   =   $ 270,480/-

1.b) Out side suppliersoffer need not be accepted it cost $ 21 per unit that is more than our relevent cost.

2.a) Purchased @ $ 21 and segment margin is 56,220. The total cost of purchase

14,700 * 21 = 308,700

2.b) The purchase will generate additional revenue of $ 56,220 so the outside purchase @ $ 21 should be accepted

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