yEngines, Ltd, manufactures a vaniety of engi nes for use in heavy equipment. Th

Question

yEngines, Ltd, manufactures a vaniety of engi nes for use in heavy equipment. The company has always produced all of the necessary parts for its supplier has offered to sell one type of carburetor to Troy Engines, Ltd, for a cost of $34 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor intemally ncluding all of the carburetors. An outside 15,100 Per Units Unit Per Year Direct materials Direct labor Variable manufacturing overhead Foxed manufacturing overhead, traceable Fored manufacturing overhead, allocated Total cost S 9 5135,900 11 168,100 2 30,200 9 135,900 13 196,300 5 44 S664,400 "40% supervisory salanes,80% depreciation of special equipment (no resale value). Required a. Assuming that the company has no alternative 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.) Total relevant cost (15,100 units b. Should the outside supplier's offer be accepted? O Reject O Accept 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 $138,840 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.) Total relevant cost (15,100 units 2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for 534 per unit? O Reject O Accept

Explanation / Answer

1 - a calculation of total cost of making and buying the parts cost of making 1 2 3 particulars cost per unit total cost for 15100 units ( cost per unit * 15100 ) direct materials 9 135900 direct labor 11 166100 variable manufacturing overheads 2 30200 fixed manufacturing overheads 3.6 54360 total 25.6 386560 cost of buying 34 513400 particulars make buy total relevant cost for 15100 units 386560 513400 note fixed manufacturing overheads 40 % of supervisor salary is relevant 9*40% 3.6 1 -b the offer should be rejected as the cost of manufacture is less than the cost of buying 2 - a calculation of the relevant cost with the segment margin 1 cost of manufacturing 386560 2 segment margin 138840 3 total relevant cost ( 1 + 2 ) 525400 2 cost of buying 513400 the offer should be accepted as the cost of buying is less than the cost of manufacturing

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