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 $44 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 14,400 Per Units Unit Per Year $ 13 $187,200 15 216,000 3 43,200 6* 86,400 17 244,800 Total cost $ 54 $777,600 *40% supervisory salaries; 60% 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.) Make Buy Total relevant cost (14,400 units) 1b. Should the outside supplier's offer be accepted? O Accept O Reject

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 187200 Direct labour 216000 Variable overhead 43200 Fixed overhead 34560 Purchase cost 633600 Total relevant cost 480960 633600

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