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 $46 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: 14,700 Per Units Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Unit Per Yea $ 13 $191,100 15 220,500 2 29,400 9 132,300 17 249,900 Total cost $ 56 $823,200 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 (14,700 units)

Explanation / Answer

1a) Calculate total relevant cost :

1b) Reject

2a) Calculate total relevant cost :

2b) Accept

Make Buy Direct material 191100 Direct labour 220500 Variable overhead 29400 Fixed overhead (132300*40%) 52920 Purchase cost (14700*46) 676200 Total relevant cost 493920 676200

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