Exercise 12-3 Make or Buy a Component [LO12-3] Troy Engines, Ltd., manufactures

Question

Exercise 12-3 Make or Buy a Component [LO12-3] Troy Engines, Ltd., manufactures a variaty of engines 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 S46 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 14,800 Per Units Unit Per Year Direct materials Direct labor Variable manufacturing overhead Foxed manufacturing overhead, traceable Fored manufacturing overhead, allocated Total cost S 13 5192,400 15 222,000 2 29,800 133,200 17 251,600 S 56 S828,800 "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 (14,800 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 $201,520 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 (14,800 units 2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for 548 per unit? O Reject O Accept

Explanation / Answer

1.

Per unit

differential

cost

Differential.

cost of

14,800   

units.

Make

1. A

Total relevant cost:

To make=$497,280

To buy=$680,800

1.b. reject as there is incremental cost of $183,520.

2.a.

2. B. Accept the offer and purchase from outside suppliers.

  

Per unit

differential

cost

Differential.

cost of

14,800   

units.

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