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 $20 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor intern ally: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated 14,000 Per Units Unit Per Year $5 $ 70,000 7 98,000 3 42,000 6 84,000 9 126,000 Total cost $ 30 $420,000 "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.) Make Buy Total relevant cost (14,000 units)

Explanation / Answer

Troy Engines Lts As Fixed Manufacturing traceable and Allocated expenses remain unchanged whether the part is made or bought , those are not relevant costs We are taking variable costs as relevant. Relevant Cost Of Making Per Unit Total for 14000 units Direct Materials                            5                70,000 Direct Labor                            7                98,000 Variable Manufacturing OH.                            3                42,000 1a. Total Relevant Cost to make 14000 units $          210,000 Total relevant cost to Buy 14000 units @20/unit $          280,000 1b. The supplier's offer should not be accepted. 2.a. If the carburetors purchases and free capacity used for new products; then; Total Relevant Cost to make 14000 units Variable cost @15/unit               210,000 40% of traceable fixed cost (depreciation excluded as sunk cost)                  33,600 Total Relevant Cost to make 14000 units               243,600 Total relevant cost to Buy 14000 units @20/unit               280,000 Less: Additional prodcut segment margin               (51,400) Net relevant cost to Buy 14000 units @20/unit               228,600 2.b. so Troy Engine should accept the offer for carburetor's @$20 per unit.

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