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 intenally: 14,900 Per Units Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Unit Per Year $ 9 $134,100 11 163,900 3 44,700 6* 89.400 13 193,700 Total cost $ 42 $625,800 *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 (14,900 units) $ 378,460476,800 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 $112,340 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 (14,900 units) $490,800$ 476,800 2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $32 per unit? O Accept O Reject

Explanation / Answer

1 Per unit Total Make Buy Make Buy Direct materials 9 134100 Direct labor 11 163900 Variable manufacturing overhead 3 44700 Fixed manufacturing overhead traceable 2.4 35760 Purchase cost 32 476800 Total 378460 476800 Make Buy Total relevant cost 378460 476800 1b Reject 2a Make Buy Total cost 378460 476800 Opportunity cost 112340 Total relevant cost 490800 476800 2b Accept

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