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 $32 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: 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. 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 $112,620 per year. Compute the total cost of making and buying the parts.

Explanation / Answer

Answer 1a. Choise of Action Make Buy Production units 15700 15700 Purchase cost @$32 each 0 502400 Production Cost: Direct Material @$9 141300 Direct Labor @$11 172700 Variable Manufacturing OH @$3 47100 Fixed Manufacturing OH Tracleab @$6 94200 Fixed Manufacturing OH Allocated @$13 204100 Relevent Cost 659400 502400 Answer 1b. Order should be accepted Answer 2a. Choise of Action Make Buy Production units 15700 15700 Purchase cost @$32 each 0 502400 Production Cost: Direct Material @$9 141300 Direct Labor @$11 172700 Variable Manufacturing OH @$3 47100 Fixed Manufacturing OH Tracleab @$6 94200 Fixed Manufacturing OH Allocated @$13 204100 Loss of Opportunity cost if production stops 117620 Relevent cost 777020 502400 Answer 2b. Offer should be accepted

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