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 $36 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 20,000 Units Per Year Direct materials $ 13 $ 260,000 Direct labor 11 220,000 Variable manufacturing overhead 4 80,000 Fixed manufacturing overhead, traceable 6* 120,000 Fixed manufacturing overhead, allocated 9 180,000 Total cost $ 43 $ 860,000

 1. 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 20,000 carburetors from the outside supplier.

 2. 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 $200,000 per year. Compute the total cost of making and buying 20,000 carburetors.

Answer 1

Solution 1:

Troy Engines Ltd - Total cost of making and Buying
Particulars	Making Carbureator (Alt 1)	Buying Carbureator (Alt 2)
Costs:
Purchase Price (20000*$36)	$0.00	$720,000.00
Direct material	$260,000.00	$0.00
Direct Labor	$220,000.00	$0.00
Variable overhead	$80,000.00	$0.00
Fixed manufacturing overhead, traceable	$120,000.00	$0.00
Total Cost	$680,000.00	$720,000.00

Solution 2:

Troy Engines Ltd - Total cost of making and Buying
Particulars	Making Carbureator (Alt 1)	Buying Carbureator (Alt 2)
Costs:
Purchase Price (20000*$36)	$0.00	$720,000.00
Direct material	$260,000.00	$0.00
Direct Labor	$220,000.00	$0.00
Variable overhead	$80,000.00	$0.00
Fixed manufacturing overhead, traceable	$120,000.00	$0.00
Loss of opportunity of new product margin	$0.00	-$200,000.00
Total Cost	$680,000.00	$520,000.00