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

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 alwaysS 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 24 900,000 Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead, allocated 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 to 1 decimal places.) Make Buy Total differential cost (per unit) 94.5

Explanation / Answer

Per Unit

                                                                             Make          Buy

Cost of purchasing $94.50

Direct materials                                                    $ 21

Direct labor                                                          $25

Variable manufacturing overhead                        $18

Fixed manufacturing overhead, traceable** $ 9.50

Fixed manufacturing overhead, allocated             0

Total costs                                                           $ 73.50      $94.50

** Only the supervisory salaries can be avoided if the carburetors are purchased. The remaining book value of the special equipment is a sunk cost; hence, the $19 per unit depreciation expense is not relevant to this decision.

Total relevant costs - MAKE (37500 Units) $ 27,56,250

Total relevant costs - BUY (37500 Units)           $ 35,43,750

Answer 2A

Total Differential Cost – MAKE

= Cost of making + Opportunity cost - new product line segment margin

= $ 27,56,250 + $ 8,20,000

= $ 35,76,250

Total Differential Cost – BUYING

= Cost of Buying

= $ 35,43,750

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