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				14,300 Units Per Year
Direct materials	$	9			$	128,700
Direct labor		11				157,300
Variable manufacturing overhead		2				28,600
Fixed manufacturing overhead, traceable		9*				128,700
Fixed manufacturing overhead, allocated		13				185,900
Total cost	$	44			$	629,200

*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 $125,120 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

Answer 1

1a.
Calculation of total cost of making and buying the product
	Make	Buy
Direct materials	$9.00
Direct labor	$11.00
Variable manufacturing overhead	$2.00
Fixed manufacturing overhead, traceable (9*40%)	$3.60
Fixed manufacturing overhead, allocated	$0.00
Cost of purchasing		$34.00
Total unit costs	$25.60	$34.00
Number of units produced per year	14300	14300
Total costs	$366,080	$486,200
In case of fixed manufacturing overhead traceable, depreciation expense would still continue even if company purchases the product and the supervisory salary can be avoided.
1b.
The cost of making the product is lower than purchase cost from the supplier and so company should reject the outside supplier's offer
2a.
	Make	Buy
Direct materials	$9.00
Direct labor	$11.00
Variable manufacturing overhead	$2.00
Fixed manufacturing overhead, traceable (9*40%)	$3.60
Fixed manufacturing overhead, allocated	$0.00
Cost of purchasing		$34.00
Total unit costs	$25.60	$34.00
Number of units produced per year	14300	14300
Total costs	$366,080	$486,200
Opportunity cost lost	$125,120
Total costs incurred	$491,200	$486,200