ezta mhed Troy Engines, Ltd., manufactures a variety of engines for use in heavy
ID: 2541922 • Letter: E
Question
ezta mhed Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company hes always produced all of the necessary parts for its engine 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 s, including all of the carburetors. An outside producing the carburetor internally: Per Units Unit Per Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated $ 9 $130,500 11 159,500 2 29,000 9 130,500 3 188,500 Total cost 44 $638,000 "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 (14.500 units) $ 371.200 $ 493.000 1b. Should the outside supplier's offer be accepted? O Reject Accept 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 $135,800 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 (14.500 units)Explanation / Answer
1. The amount of cost for buying the carburetors is
14500*34= 493000
The cost for making the carburetors i.e. extra cost incurred when making them is
130500+159500+29000+130500*0.40 = 371200
2. Since the cost when buying them is more we should reject the proposal
3.
Tota relavant cost of making will remain same i.e. 371200
B. The relavant cost of buying them is cost minus the margin earned i.e. 493000-135800= 357200
This proposal can be accepted.
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