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 $19 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		14,100 Units Per Year
Direct materials	$	5	$	70,500
Direct labor		7		98,700
Variable manufacturing overhead		2		28,200
Fixed manufacturing overhead, traceable		6*		84,600
Fixed manufacturing overhead, allocated		9		126,900
Total cost	$	29	$	408,900

*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 $46,660 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 $19 per unit?     Accept Reject

   

Answer 1

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

	Make	Buy
Direct materials	70500
Direct labour	98700
Variable manufacturing overhead	28200
Fixed manufacturing overhead (84600*40%)	33840
Purchase cost (14100*19)		267900
Total	231240	267900

1b) Reject, Outsiders supplier offer should be 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 $46,660 per year. Compute the total cost of making and buying the parts.

	Make	Buy
Direct materials	70500
Direct labour	98700
Variable manufacturing overhead	28200
Fixed manufacturing overhead (84600*40%)	33840
Opportunity cost	46660
Purchase cost (14100*19)		267900
Total	277900	267900

2b) Accept, Outsiders supplier offer should be accept.