Troy Engines Ltd manufactures a variety of engines for use in heavy equipment Th
ID: 2466742 • 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 $20 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 suppliers offer be accepted? Accept Reject Suppose that if the carburetors were purchased, Troy Enghes, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $56 260 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 $20 pei unit.Explanation / Answer
Total Relevant Cost(15100 units)
Make $ 262740
Buy $302000
1b Reject
As per the table above, if the offer is accepted it would reduce the total income by $39260. Hence it is beneficial to make the product.
#Fixed capacity that cannot be used elsewhere is unavoidable and hence ireelevant for decision making hence ignored. However, supervisior if not used can be laid off and thus this cost (90600*40% = $36240) is avoidable hence relevant.
2a.
Total Relevant Cost(15100 units)
Make $ 262740
Buy $245740
2b Accept
As per the table above, if the offer is accepted it would increase the total income by $17000. Hence it is beneficial to buy the product.
#The Segment margin shall be earned only if product is purchased from market, hence effective purchase cost shall be proportionately reduced.
1.a. Make($) Buy($) Net Income Increase/ (Decrease)($) Direct Materials 75500 0 75,500 Direct Labour 105700 0 105,700 Variable Overheads Costs 45300 0 45,300 Fixed Manufacturing Overheads (Supervisor Salary) 36240 0 36,240 Purchase Price $20*15100 = 302000 (302,000) Total Annual Cost 262740 302000 (39,260)Related Questions
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