Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment

Question

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 sell one type of carburetor to Troy Engines, Ltd., for a cost of $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:

*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).

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 $150,000 per year. Compute the total cost of making and buying the parts.

Per Unit 15,000 Units
Per Year Direct materials $ 14 $ 210,000 Direct labor 10 150,000 Variable manufacturing overhead 3 45,000 Fixed manufacturing overhead, traceable 6 * 90,000 Fixed manufacturing overhead, allocated 9 135,000 Total cost $ 42 $ 630,000

Explanation / Answer

Make Buy Per unit Total Per unit Total Direct materials 14 210000 Direct labor 10 150000 Variable manufacturing overhead 3 45000 Fixed manufacturing overhead, traceable 2 30000 Purchase cost 35 525000 Opportunity cost 150000 Total cost 585000 525000

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