AT&T; LTE 5:58 PM ezto.mheducation.com e connect Moesha Graham AF 211 New 2. ins

Question

AT&T; LTE 5:58 PM ezto.mheducation.com e connect Moesha Graham AF 211 New 2. ins 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: Direct labor Fixed manufacturing overhead, traceabke Total coat One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value) 1a. Assuming that the company has no altemative use for the facilities that are now being used to produce the carburetors, compute the total cost of making and buying the parts 1b. Should the outside supplier's offer be accepted? 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. 2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $35 per unit?

Explanation / Answer

Req 1A: Cost of buying the components (15,000 units @ 35) 525000 Relevant of cost of manufacture (15000 units) Direct maetrial (15,000 units@14) 210,000 Direct Labour (15,000 units@10) 150000 Variable manufacturing cost (15,000 units @3) 45000 Fixed overhead traceable (15,000 units@2) 30000 Cost of manufacture 435,000 Cost of Buy 525000 Cost of manufacture 435000 Note: Traceable fixed expense of $4 (depreciation on special equipment and fixed overheads allocated portion is bound to incurr in both the options. Hence is treated as irrelevant cost. Req 1B: Hence, company should make its own component Req 2: Idle capacity used in another rproduct segment resulting in profit of $ 150,000 per year Cost of buying the component: Total cost of buying the component( 15000 units @35) 525000 Less: Profit realised from product segment owing to idle capacity 150000 Net cost of buying the component 375000 Req 2B. In this situation, component must buy the component.

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