Exercise 10-3 Make or Buy a Component [LO10-3] Troy Engines, Ltd., manufactures
ID: 2524289 • Letter: E
Question
Exercise 10-3 Make or Buy a Component [LO10-3]
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:
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.)
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Should the outside supplier’s offer be accepted?
accept or reject?
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 $137,360 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)
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Should Troy Engines, Ltd., accept the offer to buy the carburetors for $34 per unit?
reject or accept?
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:
Explanation / Answer
1a) Total relevant cost :
1b) Outside supplier's offer should be rejected
2a) Total relevant cost :
2b) Outside supplier's offer should be accepted
Make Buy Direct material 138600 Direct labour 169400 Variable manufacturing overhead 30800 Fixed manufacturing overhead (138600*40%) 55440 Purchase cost (15400*34) 523600 Total 394240 523600Related Questions
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