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 $45 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		15,700 Units Per Year
Direct materials	$	13	$	204,100
Direct labor		15		235,500
Variable manufacturing overhead		4		62,800
Fixed manufacturing overhead, traceable		6*		94,200
Fixed manufacturing overhead, allocated		17		266,900
Total cost	$	55	$	863,500

*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 $176,420 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 $45 per unit?
	Accept Reject

Answer 1

Requirement 1(a)

	MAKE	BUY
Total Relevant Costs ( 14,300 Units)	$ 540,080	$ 706,500

	MAKE	BUY
Purchase Cost	-	$45.00
Direct materials	$13.00	-
Direct labor	$15.00	-
Variable manufacturing overhead	$4.00	-
Fixed manufacturing overhead, traceable **	$2.40	-
Fixed manufacturing overhead, common	-	-
Total costs	$34.40	$45.00

** Fixed manufacturing overhead, traceable = $6.00 x 40% = $2.40

Total Relevant Costs (MAKE ) = 15,700 x $34.40 = $ 540,080

Total Relevant Costs (BUY ) = 15,700 x $45.00 = $ 706,500

Requirement 1(b) - Should the outside supplier's offer be accepted?

REJECT. Outside supplier's offer should not be accepted since the Total Relevant Cost is more in case of BUYING OPTION

Requirement 2(a)

	MAKE	BUY
Cost of making	$ 540,080	-
Cost of buying	-	$ 706,500
New product line segment margin	$176,420	-
Total Relevant Costs	$716,500	$ 706,500

Requirement 2(b) - Should Troy Engine, Ltd. accept the offer to buy the carburetor for $47 per unit?

ACCEPT. Since the total relevant cost is Less in the case of BUYING OPTION