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 $42 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 15,500 Units Per Year Direct materials $ 13 $ 201,500 Direct labor 15 232,500 Variable manufacturing overhead 1 15,500 Fixed manufacturing overhead, traceable 6* 93,000 Fixed manufacturing overhead, allocated 17 263,500 Total cost $ 52 $ 806,000 *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.) 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 $178,300 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.) 2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $42 per unit? Reject Accept

Explanation / Answer

1a. Total Cost of Making and Buying:

1b. The outside supplier's offer should be rejected as the relevant cost of making the caburetor is $35 per unit only as compared to the purchasing cost of carburetor of $42 per unit.

1c. Cost of making and buying:

1d. Statement of Cost Benefit

Thus, the offer to buy should be accepted.

Making Buying Puchase Cost 42 - Manufacturing Cost: Direct material 13 Direct labor 15 Variable manufacturing overhead 1 Traceable fixed manufacturing cost 6 Relevant cost 42 35 Allocated Fixed manufacturing Cost: Supervisory salaries(263500x 40%) 6.80 Depreciation of special equipment(263500x 60%) 10.20 Total Cost 42 52

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