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 $20 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 15,600 Per Units Unit Per Year $5 $ 78,000 7 109,200 3 46,800 6 93,600 9 140,400 Total cost $ 30 $468,000 "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 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 (15,600 units) 1b. Should the outside supplier's offer be accepted? Accept Reject

Explanation / Answer

1a) Calculate total relevant cost :

1b) Troy engines, Ltd. reject the offer

2a) Calculate total relevant cost :

2b) Troy engines, Ltd. accept the offer

Make Buy Direct material 78000 Direct labour 109200 Variable overhead 46800 Fixed overhead (93600*40%) 37440 Purchase cost (15600*20) 312000 Total relevant cost 271440 312000

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