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 $18 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 $ 5 $ 71,500 Direct labor 7 100,100 Variable manufacturing overhead 1 14,300 Fixed manufacturing overhead, traceable 6* 85,800 Fixed manufacturing overhead, allocated 9 128,700 Total cost $ 28 $ 400,400 *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 $48,180 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

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 (14300*$18)	$0.00	$257,400.00	-$257,400.00
Direct material	$71,500.00	$0.00	$71,500.00
Direct Labor	$100,100.00	$0.00	$100,100.00
Variable overhead	$14,300.00	$0.00	$14,300.00
Avoidable Fixed Overhead ($85,800*40%)	$34,320.00	$0.00	$34,320.00
Total Cost	$220,220.00	$257,400.00	-$37,180.00

Solution 1b:

As relevant cost of buying is higher than relevant cost to make, therefore outside supplier offer should not be accepted.

solution 2a:

Differential Analysis - 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 (14300*$18)	$0.00	$257,400.00	-$257,400.00
Direct material	$71,500.00	$0.00	$71,500.00
Direct Labor	$100,100.00	$0.00	$100,100.00
Variable overhead	$14,300.00	$0.00	$14,300.00
Avoidable Fixed Overhead ($85,800*40%)	$34,320.00	$0.00	$34,320.00
Loss of opportunity of new product margin	$48,180.00	$0.00	$48,180.00
Total Cost	$268,400.00	$257,400.00	$11,000.00