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 $32 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:

   

		Per Unit		14,200 Units Per Year
Direct materials	$	9	$	127,800
Direct labor		11		156,200
Variable manufacturing overhead		3		42,600
Fixed manufacturing overhead, traceable		6*		85,200
Fixed manufacturing overhead, allocated		13		184,600
Total cost	$	42	$	596,400

*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.)

    

      

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 $112,720 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

   

      

2b.	Should Troy Engines, Ltd., accept the offer to buy the carburetors for $32 per unit?
	Reject Accept

Answer 1

1a.
		Make	Buy
	Total relevant costs (14,200 units)	$377,720	$454,400
		Per Unit
	Cost of purchasing		$32.00
	Direct materials	$9.00
	Direct labor	$11.00
	Variable manufacturing overhead	$3.00
	Fixed manufacturing overhead, traceable	$3.60
	Fixed manufacturing overhead, common	$0.00
		$26.60	$32.00
	Note: Only the supervisory salaries can be avoided, if the carburetors are purchased.
	The remaining book value of the special equipment is a sunk cost; hence, the $3.6 per
	unit depreciation expense is not relevant to this decision
1b.	No, the outside supplier's offer should not be accepted
2a.	Total relevant costs (14,200 units)	$490,440	$454,400
	Cost of making	$377,720
	Cost of buying		$454,400
	Opportunity cost - new product line segment margin	$112,720
2b.	Accept