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 $19 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:^*40% supervisory salaries: 60% depreciation of special equipment (no resale value). Required: 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.) Should the outside supplier's offer be accepted? Reject Accept 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 $52,560 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 $19 per unit?

Explanation / Answer

1a) Relevant cost

   Total cost of Buying = $19 per unit * 15600

   = $296400

   Cost of manufacturing internally :

   Direct material = $5

   Direct labour =$7

   Variable manufactured overhead =$2

Fixed manufacturing overhead(tracebale) = $2.4    [ $6 *40% {supervisior salaries} ]

Total cost = $16.4 per unit

Note:-   Fixed manufactuing overhead is not considered for claculating relevant cost

Make Buy

Relevant cost $16.4 per unit * 15600 units $19 per unit * 15600

=$255840 = $296400

  

  

  1b) No , Outside supplier's offer should not be accepted because, it costs $40560 [ $296400 - 255840] more , if company purchase from the supplier .

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