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 $35 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				15,400 Units Per Year
Direct materials	$	9			$	138,600
Direct labor		11				169,400
Variable manufacturing overhead		3				46,200
Fixed manufacturing overhead, traceable		9*				138,600
Fixed manufacturing overhead, allocated		13				200,200
Total cost	$	45			$	693,000

*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.)

  

Total Relevant Cost (15,400)

make = buy =

1b. Should the outside supplier’s offer be accepted?

Total Relevant Cost (15,400)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 $135,360 per year. Compute the total cost of making and buying the parts.(Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

make = buy =

2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $35 per unit?

Answer 1

Answer :-

1.a. Compute the total cost of making and buying the parts:

Particulars	Make Option	Buy Option
Direct Materials (46,200 * 9)	415,800
Direct Labor (46,200 * 11)	508,200
Variable Manufacturing Overhead (46,200 * 3)	1,38,600
Fixed Manufacturing Overhead , Traceable (46,200 * $9 * 40%)	166,320
Purchasing Cost (46,200 * 35)		16,17,000
Total Cost	12,28,920	16,17,000

The total relevant cost for make option is $12,28,920 and total relevant cost for buy option is $ 16,17,000.

1.b.  Outside supplier's offer should be rejected as total relevant cost for make option is less than the relevant cost for buy option.

Therefore,the outside supplier's offer should be rejected.

2.a Compute the total cost of making and buying the parts :

Particulars	Make option($)	Buy Option($)
Cost of Making	12,28,920
Cost of Buying		16,17,000
Opportunity Cost	135,360
Total Relevant Cost	13,64,280	16,17,000

therefore, total relevant cost for make option is $13,64,280 and total relevant cost for buy option is $16,17,000.

2.b. The offer to buy the carburetors for $35 per unit should be accepted as total relevant cost for buying is less than the relevant cost for making.

Therefore,the offer to buy carburetors for $35 per unit should be accepted.