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 $32 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		3				42,900
Fixed manufacturing overhead, traceable		6*				85,800
Fixed manufacturing overhead, allocated		13				185,900
Total cost	$	42			$	600,600

*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 $114,380 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 $32 per unit?

	Accept
	Reject

Answer 1

Required 1 :
	Make	Buy
Direct materials	128700
Direct labor	157300
Variable manufacturing overhead	42900
Buying cost ( 14300* 32 )		457600
Fixed manufacturing overhead, traceable ( Supervisor's salary = 85800*40% )	34320
Total relevant cost	363220	457600

Note : Allocated fixed manufacturing overhead and depreciation of special equipment will appear in both the situations and will not affect the decision marking and hence the same is ignored in the calculation.

Total relevant cost of making	363220
Less : Total relevant cost of buying	457600
Financial advantage (Disadvantage)	-94380

Required 2 :

Answer : No

Reason : As the outside supplier's offer is resulting in a financial disadvantage

Required 3 :
	Make	Buy
Direct materials	128700
Direct labor	157300
Variable manufacturing overhead	42900
Buying cost ( 14300* 32 )		457600
Fixed manufacturing overhead, traceable ( Supervisor's salary = 85800*40% )	34320
Less: Segment margin of the new product	114380
Total relevant cost	363220	343220

Total relevant cost of making	363220
Less : Total relevant cost of buying	343220
Financial advantage (Disadvantage)	20000

Required 4 :

Answer : Yes

Reason : As the outside supplier's offer is resulting in a financial advantage