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 $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:

Per Unit

15,100 Units
Per Year

  Direct materials

$

9   

$

135,900  

  Direct labor

11   

166,100  

  Variable manufacturing overhead

3   

45,300

  Fixed manufacturing overhead, traceable

9*  

135,900  

  Fixed manufacturing overhead, allocated

13   

196,300

  Total cost

$

45   

$

679,500

*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 (15,100 units)

1b.

Should the outside supplier’s offer be accepted?

__Reject

__Accept

2a.

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 $140,840 per year. 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 (15,100 units)

2b.

Should Troy Engines, Ltd., accept the offer to buy the carburetors for $35 per unit?

__Accept

__Reject

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 $35 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

1a) Statement showing computations Particulars Make Buy Direct Materials            135,900.00 Direct Labour            166,100.00 Variable Manufacturing Overhead              45,300.00 Fixed manufacturing overhead, traceable =135,900*40%              54,360.00 Purchase Cost = 15,100*35           528,500.00 Total Relevant Costs            401,660.00           528,500.00 1b) outside supplier’s offer be REJECTED 2a) Statement showing computations Particulars Make Buy Direct Materials            135,900.00 Direct Labour            166,100.00 Variable Manufacturing Overhead              45,300.00 Fixed manufacturing overhead, traceable =135,900*40%              54,360.00 Purchase Cost = 15,100*35           528,500.00 segment margin of the new product         (140,840.00) Total Relevant Costs            401,660.00           387,660.00 2b) outside supplier’s offer be ACCEPTED

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