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 $30 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor intermally: 14,700 Per Units Unit Per Year Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated S 9 $132,300 11 161,700 1 14,700 6 88,200 13 191,100 Total cost S 40 $588,000 40% supervisory salaries: 60% depreciation of special equipment (no resale value). Required: 1a. Assuming that the company has no altenative 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) b. Should the outside supplier's offer be accepted? O Accept 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 $110,020 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 (14,700 units)

Explanation / Answer

Note - Allocated cost could not be considerd in calcualtion of making the product as it is not specifically expensed for ths product.

1(b) reject the proposal as the making cost is coming $ 27 which is lesser than purchasing cost.

2(a) now if he purchase the same at $ 30 he losses the the oppurtunity cost of $ 3 per caberuters.

total oppurtunity profit = 3*14700

= 44100

and the segment margin for using the freed capacity = 110020

Note - Segment margin means cost before allcated fixed overhead.

Conclusion - should accept the proposal.

Please comment in case of any further clarification required/wrong answer.

Computation of making and buying the facilities Output 14700 Particulars per unit Total Direct material 9 132300 Direct labor 11 161700 variable manufacturing overhead 1 14700 Total variable overhead 308700 Fixed manufacturing overhead, traceable 6 88200 Total relavant cost 27 396900

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