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: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated 14,100 Per Units Unit Per Year $ 9 $126,900 11 155,100 3 42,300 6* 84,600 13 183,300 Total cost $ 42 $592,200 "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.) Make Buy Total relevant cost (14,100 units) 1b. Should the outside supplier's offer be accepted? O Accept O 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 $100,060 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.) Make Buy Total relevant cost (14,100 units) 2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $32 per unit? O Accept O Reject

Explanation / Answer

1a) Total relevant cost :

1b) Reject

2a) Total relevant cost :

2b) Accept

Make Buy Direct material 126900 Direct labour 155100 Variable manufacturing overhead 42300 Fixed manufacturing overhead (84600*40%) 33840 Purchase cost (14100*32) 451200 Total relevant cost 358140 451200

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