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 $45 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 labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated 15,400 Per Units Unit Per Year S 13 $200,200 15 231,000 1 15,400 9* 138,600 17 261,800 Total cost S 55 $847,000 "40% supervisory salaries, 60% depreciation of special equipment (no resale value) Required 1a. Assuming that the company has no alternative use for the facilities that are now being used to produce f making and buying the parts. (Round your Fixed the carburetors, comp manufacturing overhead per unit rate to 2 decimals.) ute the total cost o Make Buy Total relevant cost (15,400 units) 1b. Should the outside supplier's offer be accepted? O Reject O Accept

Explanation / Answer

1a) Compute total cost of making and buying :

1b) Outside supplier's offer should be rejected..

2a) Calculate total relevant cost :

2b) Outside supplier's offer should be accepted.

Make Buy Direct material 200200 Direct labour 231000 Variable overhead 15400 Fixed overhead 55440 Purchase cost 693000 Total relevant cost 502040 693000

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