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 $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: 15,000 Units Per Unit Per Year Direct materials Direct labor Variable 210,000 150,000 45,000 90,000 135,000 630,000 10 manufacturing overhead overhead, traceable overhead, allocated Fixed manufacturing 67 Fixed manufacturing Total cost 42 One-third supervisory salaries; two-thirds 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 1b. Should the outside supplier's offer be accepted? 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 $150,000 per year. Compute the total cost of making and buying the parts

Explanation / Answer

Answer:-1a)-

1b)-The offer form outside supplier should not be accpeted becuase cost of making of product  is less than cost of buying.Hence product should be manufactured.

Explanation:- 1)-In fixed manufacturing overhead, traceable only supervisory salaries will be taken for decision making, it is considered as a avoidable cost and relevant for decision making.Depreciation on special equipment is a sunk cost hence it is not a relevant cost, hence not considered.

2)- Fixed manufacturing overhead allocated are unavoidable fixed cost hence not considered in relevant cost, it is continue to occur whether to manufacture the product or buy the product.

2a)-

If the carburetors are purchase from outside supplier then loss in purchase will be=

($35 per unit -$29 per unit)*15000 units =$90000

But product is purchase from outside supplier then Troy Engines ltd. Can use freed capacity to launch a new product & segment margin of the new product would be $150000.

Hence net benefit wiil be =Benefit from new product-Loss in purchase from supplier

                                          =$150000-$90000 =$60000

Statement of comprative cost Manufaturing Amount Purchase from outside Amount Per unit $ Per unit $ Direct Material        14.00 Purchase Cost        33.00 Direct Labor        10.00 Vaiable Manufaturing Overhead          3.00 Fixed Manufaturing overhead traceable ($6*1/3)          2.00 Total Manufaturing cost        29.00 Total Purchase cost        35.00

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