Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment
ID: 2477610 • 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 $34 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:
direct materials
Q 1. 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.)
Q 2. 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 $134,360 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)
direct materials
9 $138,600 Direct labor 11 169,400 Variable manufacturing overhead 2 30,800 Fixed manufacturing overhead, traceable 9* 138,600 Fixed manufacturing overhead, allocated 13 200,200 Total cost 44 $677,600Explanation / Answer
1
Calculation of total cost of making and buying the parts, Assuming that the company has no alternative use for the facilities:
Make
Buy
Direct materials
$ 138,600
Direct labor
$ 169,400
Variable manufacturing overhead
$ 30,800
Fixed manufacturing overhead, traceable
$ 138,600
Fixed manufacturing overhead, allocated
$ 200,200
$ 200,200
Purchase Cost (15400 Units * $34)
$ 523,600
Total cost
$ 677,600
$ 723,800
2
Calculation of total cost of making and buying the parts, if the company has an alternative use for the facilities:
Make
Buy
Direct materials
$ 138,600
Direct labor
$ 169,400
Variable manufacturing overhead
$ 30,800
Fixed manufacturing overhead, traceable
$ 138,600
Fixed manufacturing overhead, allocated
$ 200,200
$ 200,200
Purchase Cost (15400 Units * $34)
$ 523,600
Opportunity Cost (segment margin of the new product )
$ 134,360
Total cost
$ 677,600
$ 858,160
1
Calculation of total cost of making and buying the parts, Assuming that the company has no alternative use for the facilities:
Make
Buy
Direct materials
$ 138,600
Direct labor
$ 169,400
Variable manufacturing overhead
$ 30,800
Fixed manufacturing overhead, traceable
$ 138,600
Fixed manufacturing overhead, allocated
$ 200,200
$ 200,200
Purchase Cost (15400 Units * $34)
$ 523,600
Total cost
$ 677,600
$ 723,800
2
Calculation of total cost of making and buying the parts, if the company has an alternative use for the facilities:
Make
Buy
Direct materials
$ 138,600
Direct labor
$ 169,400
Variable manufacturing overhead
$ 30,800
Fixed manufacturing overhead, traceable
$ 138,600
Fixed manufacturing overhead, allocated
$ 200,200
$ 200,200
Purchase Cost (15400 Units * $34)
$ 523,600
Opportunity Cost (segment margin of the new product )
$ 134,360
Total cost
$ 677,600
$ 858,160
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