Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment

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 $47 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:

*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?

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 $195,080 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 $47 per unit?

Per Unit 14,200 Units
Per Year Direct materials $ 13 $ 184,600 Direct labor 15 213,000 Variable manufacturing overhead 3 42,600 Fixed manufacturing overhead, traceable 9* 127,800 Fixed manufacturing overhead, allocated 17 241,400 Total cost $ 57 $ 809,400

Explanation / Answer

Incremental analysis Make Buy Effect on Income Direct material 184600 184600 Direct labor 213000 213000 Variable Mmanufacturing OH 42600 42600 Fixed Manufacturing OH 51120 51120 (9*40% *14200 units) Purchase cost from supplier 667400 -667400 Total cost 491320 667400 -176080 Hence, Offer must be rejected Req c: Incremental analysis: Make Buy Effect on Income Direct material 184600 184600 Direct labor 213000 213000 Variable Mmanufacturing OH 42600 42600 Fixed Manufacturing OH 51120 51120 (9*40% *14200 units) Purchase cost from supplier 667400 -667400 Contribution earned from New product -195080 195080 Total cost 491320 472320 19000 Hence, offer shall be accepted now.

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