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 $34 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		15,700 Units Per Year
Direct materials	$	9	$	141,300
Direct labor		11		172,700
Variable manufacturing overhead		2		31,400
Fixed manufacturing overhead, traceable		9*		141,300
Fixed manufacturing overhead, allocated		13		204,100
Total cost	$	44	$	690,800

*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?
	Reject Accept

    

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 $141,880 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 $34 per unit?
	Reject Accept

Answer 1

Requirement 1a

Statement of Cost Analysis(15700 Units)
	Make	Buy	Incremental (cost) or benefit
Purchase Price	$                       -	$    5,33,800.00	$    (5,33,800.00)
Direct Material	$    1,41,300.00		$       1,41,300.00
Direct labor	$    1,72,700.00		$       1,72,700.00
Variable Manufacturing Overheads	$        31,400.00		$          31,400.00
Fixed Manufacturing Overheads, Avoidable	$        56,520.00		$          56,520.00
Fixed Manufacturing Overheads, Allocated and unavoidable	$    2,04,100.00	$    2,04,100.00	$                          -
Total Relevant Cost	$    6,06,020.00	$    7,37,900.00	$    (1,31,880.00)

Tota cost of making =$

Total units = Total labor cost /Cost per unit

Cost of manufacturing =$606,020

Total cost of Purchase =$737900

If answer do not match then use below given answer--- Cost of manufacturing = $    4,01,920.00

Total cost of Purchase = $    5,33,800.00

.

.

Requirement 1b

Answer---Reject

Offer is reject because purchase cost if higher

Requirement 2a

Statement of Cost Analysis
	Make	Buy	Incremental (cost) or benefit
Purchase Price	$                       -	$    5,33,800.00	$    (5,33,800.00)
Direct Material	$    1,41,300.00	$                       -	$       1,41,300.00
Direct labor	$    1,72,700.00	$                       -	$       1,72,700.00
Variable Manufacturing Overheads	$        31,400.00	$                       -	$          31,400.00
Fixed Manufacturing Overheads, Avoidable	$        56,520.00		$          56,520.00
Fixed Manufacturing Overheads, Allocated	$    2,04,100.00	$    2,04,100.00	$                          -
Opportunity cost	$    1,41,800.00		$       1,41,800.00
Total Relevant Cost	$    7,47,820.00	$    7,37,900.00	$             9,920.00

Requirement 2b

Answer---Accept