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: * 1/3 supervisory salaries; 2/3 depreciation (no resale value) 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

Answer)

Here, fixed manufacturing overhead will be incurred whether there is production or not. Hence only variable costs taken for calculation purpose.

Answer for 1)

Variable cost of production:

direct material+direct labor+variable manufacturing overhead

=$260000+$220000+$80000

=$660000

Or if supervisor can be removed

Then cost of making:

$660000+$120000×1/3=$700000

Cost of buying:$36×20000 units=$720000

Answer for 2)

If fridge capacity can be used for alternate to use then the cost of production =

Variable cost of production + lost profit

=$660000 (as calculated above)+$200000=$860000

If supervisor can be removed:

$700000(as calculated above)+$200000=$900000

Cost of purchase:$36×20000 units=$720000