Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment
ID: 2483909 • 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 $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:
Per Unit 15,700
Units Per Year Direct materials $ 9 $ 141,300
Direct labor 11 172,700
Variable manufacturing overhead 3 47,100
Fixed manufacturing overhead, traceable 6* 94,200
Fixed manufacturing overhead, allocated 13 204,100
Total cost $ 42 $ 659,400
*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? Accept/ Reject
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 $108,620 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 $32 per unit? Reject ?Accept
Explanation / Answer
Troy Engines Details Assuming the Supervisor's salary is avoidable cost 1a The cost details Make Buy Cost Details Per unit Total Per unit Total Total Units per year 15,700 15,700 Direct Materials 9 141,300 Direct Labor 11 172,700 Var Manufacturing OH 3 47,100 Traceable Fixed Manufacturing OH 6 94,200 3.60 56,520 Allocated Fixed Manufacturing OH 13 204,100 13 204,100 Cost of buying from Outide 32 502,400 Total Cost 42 675,100 49 763,020 1b The outside supplier's offer cannot be accepted as it results in higher cost 2a The cost details Make Buy Cost Details Per unit Total Per unit Total Total Units per year 15,700 15,700 Direct Materials 9 141,300 Direct Labor 11 172,700 Var Manufacturing OH 3 47,100 Traceable Fixed Manufacturing OH 6 94,200 3.60 56,520 Allocated Fixed Manufacturing OH 13 204,100 13 204,100 Cost of buying from Outide 32 502,400 Additional contribution from other products (108,620) Total Cost 42 675,100 49 654,400 2b In this case the outside supplier's offer can be accepted as it is resulting in lower net cost
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