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 $46 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		14,200 Units Per Year
Direct materials	$	13	$	184,600
Direct labor		15		213,000
Variable manufacturing overhead		2		28,400
Fixed manufacturing overhead, traceable		9*		127,800
Fixed manufacturing overhead, allocated		17		241,400
Total cost	$	56	$	795,200

*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?
	Reject Accept

    

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 $186,080 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 $46 per unit?
	Accept Reject

Answer 1

Solution 1a:

Differential Analysis- Troy Engines Ltd - Making Carbureator (alt 1) or Buying Carbureator (Alt2)
Particulars	Making Carbureator (Alt 1)	Buying Carbureator (Alt 2)	Financial advantage (Disadvantage) of buying (Alternative 2)
Costs:
Purchase Price (14200*$46)	$0.00	$653,200.00	-$653,200.00
Direct material	$184,600.00	$0.00	$184,600.00
Direct Labor	$213,000.00	$0.00	$213,000.00
Variable overhead	$28,400.00	$0.00	$28,400.00
Avoidable Fixed Overhead ($241,400*40%)	$96,560.00	$0.00	$96,560.00
Total Cost	$522,560.00	$653,200.00	-$130,640.00

Solution 1b:

Outside supplier offer should not be accepted.

Solution 2a:

Differential Analysis- Troy Engines Ltd - Making Carbureator (alt 1) or Buying Carbureator (Alt2)
Particulars	Making Carbureator (Alt 1)	Buying Carbureator (Alt 2)	Financial advantage (Disadvantage) of buying (Alternative 2)
Costs:
Purchase Price (14200*$46)	$0.00	$653,200.00	-$653,200.00
Direct material	$184,600.00	$0.00	$184,600.00
Direct Labor	$213,000.00	$0.00	$213,000.00
Variable overhead	$28,400.00	$0.00	$28,400.00
Avoidable Fixed Overhead ($241,400*40%)	$96,560.00	$0.00	$96,560.00
Profit margin from new product	$0.00	-$186,080.00	$186,080.00
Total Cost	$522,560.00	$467,120.00	$55,440.00

Solution 2b:

Outside supplier offer should be accepted.