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 $21 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:

   

   

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.)

    

      

    

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 $80,000 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

   

      

Should Troy Engines, Ltd., accept the offer to buy the carburetors for $21 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 sell one type of carburetor to Troy Engines, Ltd., for a cost of $21 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

1 a. Cost that is unavoidable is irrelevant for the purpose of decision making. Thus 60% of Fixed manufacturing overhead, traceable & Fixed manufacturing overhead, allocated shall be ignored.

1b. Reject. Since the total relevant cost making is less than buying.

2a.

2b. Accept. Since the total relevant cost making is more than buying.

Particulars Make($) Buy Direct materials 5 Direct labor 7 Variable manufacturing overhead 1 Supervisory salaries (40% * $9) 3.6 Cost to Buy 21 Total per unit cost 16.60 21

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