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 $30 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: 15,400 Per Units Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Unit Per Year $ 9 $138,600 11 169,400 1 15,400 6 92,400 13 200,200 Total cost $ 40 $616,000 "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 (15,400 units) 1b. Should the outside supplier's offer be accepted? Accept Reject 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 $107,640 per year. 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 (15,400 units)

Explanation / Answer

Answer 1a Calculation of total relevant cost of making and buying the parts (15400 units) Make Buy Per Unit Total Per Unit Total Direct Materials $9.00 $138,600.00 Direct Labour $11.00 $169,400.00 Variable Manufacturing overheads $1.00 $15,400.00 Fixed Manufacturing Overheads , traceable $2.40 $36,960.00 Purchase Cost $30.00 $462,000.00 Total Relevant cost $360,360.00 $462,000.00 Answer 1b The outside supplier's offer should be rejected as relevant cost to make the part is less compared to it’s purchase cost. Answer 2a Calculation of total relevant cost of making and buying the parts if company could use the freed capacity to launch a new product (15400 units) Make Buy Per Unit Total Per Unit Total Direct Materials $9.00 $138,600.00 Direct Labour $11.00 $169,400.00 Variable Manufacturing overheads $1.00 $15,400.00 Fixed Manufacturing Overheads , traceable $2.40 $36,960.00 Purchase Cost $30.00 $462,000.00 Segment margin of New Product -$107,640.00 Total Relevant cost $360,360.00 $354,360.00 Answer 2b The outside supplier's offer should be accepted as relevant cost to make the part is more compared to it’s purchase option.

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