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 Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated 16,500 Per Units Unit per Yea $ 14 $231,000 11 181,500 4 66,000 7.5* 123,750 10 165,000 Total cost $46.5 $767,250 One-tnird supervisory salaries, two-thirds depreciation of special equipment (no resale value)

Explanation / Answer

1a) Differential analysis :

1b) No, Troy engines ltd. should not accept the offer.

2a) Differential analysis :

2b) Yes, Troy engines ltd. should accept the offer.

Make Buy Direct material 231000 Direct labour 181500 Variable manufacturing overhead 66000 Fixed manufacturing overhead 41250 Purchase cost (16500*38.5) 635250 Total 519750 635250

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