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 $38.5 per unit. To evaluate this offer, Troy Engines Ltd. has gathered the following information relating to its own cost of producing the carburetor internally: 16,500 Units Unit per Year $ 14 $231,000 11 181,500 4 66,000 7.5* 123,750 10 165,000 Per Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost $46.5 $767,250 *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) 1-b. Should the outside supplier's offer be accepted? Yes No

Explanation / Answer

1 Per unit Make Buy Direct materials 14 Direct labor 11 Variable manufacturing overhead 4 Fixed manufacturing overhead traceable 2.5 Purchase cost 38.5 Total differential cost(per unit) 31.5 38.5 1b No 2a Make Buy Total cost 519750 635250 Opportunity cost 190000 Total differential cost 709750 635250 2b Yes

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