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 produce and sell one type of carburetor to Troy Engines Ltd. for a cost of $62.5 per unit. To evaluate this offer, Troy Engines Ltd. has gathered the following information relating to its own cost of producing the carburetor internally:

Compute the total differential cost per unit for producing and buying the product. (Round your answers to 1 decimal places.)

Make Buy

Total differential cost (per unit)

Should the outside supplier’s offer be accepted?

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 $360,000 per year. Compute the total differential cost in producing and buying the product when the segment margin is foregone on a potential new product line.

Should Troy Engines Ltd. accept the offer to buy the carburetors for $62.5 per unit?

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 produce and sell one type of carburetor to Troy Engines Ltd. for a cost of $62.5 per unit. To evaluate this offer, Troy Engines Ltd. has gathered the following information relating to its own cost of producing the carburetor internally:

Explanation / Answer

Make Buy Direct materials 17 Direct labour 17 Variable manufacturing overhead 10 Fixed manufacturing overhead, traceable 5.5 Purchase cost 62.5 Total differential cost (per unit) 49.5 62.5 1b No 2a Make Buy Total cost 1262250 1593750 Opportunity costs 360000 Total differential cost 1622250 1593750 2b Yes

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