Problem 9-4 Determining Whether to Make or Buy (LO1 - CC4) Troy Engines Ltd. man

Question

Problem 9-4 Determining Whether to Make or Buy (LO1 - CC4) 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 produce and sell one type of carburetor to Troy Engines Ltd. for a cost of $94.5 per unit. To evaluate this offer, Troy Engines Ltd. has gathered the following information relating to its own cost of producing the carburetor internally: Per 37,500 Units Unit per Year $ 21 $ 787,500 25 937,500 18 675,000 Fixed manufacturing overhead, traceable 28.5* 1,068,750 Fixed manufacturing overhead, allocated 24 900,000 Direct materials Direct labour Variable manufacturing overhead Total cost $116.5 $4,368,750 One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). Required 1-a. Compute the total differential cost per unit for producing and buying the product. (Round your answers Make Buy Total differential cost (per unit)

Explanation / Answer

1-a.

The allocated fixed manufacturing overhead is not considered since it would remain whether the carburetor is made or purchased from outside. The traceable supervisory salaries $9.5 ($28.5 x 1/3) would be eliminated if the part is purchased while depreciation $19 ($28.5 x 2/3) will continue irrespective of the decision.

1-b. No

2-a.

2-b. Yes

Make Buy Direct materials 21 0 Direct labor 25 0 Variable manufacturing overhead 18 0 Fixed manufacturing overhead, traceable 28.5 19 Purchase price 0 94.5 Total differential cost (per unit) $ 92.5 113.5

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