Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment
ID: 2406348 • Letter: T
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: 14,400 Units Per Year Direct materials Direct labor Variable manufacturing overheacd Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost Per Unit 15 9 S 13 S 187,200 216,000 43,200 129,600 17 S 57 S 820,800 "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.) Make Buy Total relevant cost (14,400 units) 1b. Should the outside supplier's offer be accepted? O 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 $191,560 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.) Make Buy Total relevant cost (14,400 units) 2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $47 per unit?Explanation / Answer
Answer 1a
Statement of Cost Analysis(14400 Units)
Make
Buy
Incremental (cost) or benefit
Purchase Price
$ -
$ 676,800.00
$ (676,800.00)
Direct Material
$ 187,200.00
$ -
$ 187,200.00
Direct labor
$ 216,000.00
$ -
$ 216,000.00
Variable Manufacturing Overheads
$ 43,200.00
$ -
$ 43,200.00
Fixed Manufacturing Overheads, Traceable*
$ 129,600.00
$ 77,760.00
$ 51,840.00
Fixed Manufacturing Overheads, Allocated
$ 244,800.00
$ 244,800.00
$ -
$ 820,800.00
$ 999,360.00
$ (178,560.00)
* Supervisor salary is avoidable fixed cost. It will be saved if carburetor is purchased from outside but depreciation will still be the same, so 60% fixed cost still occurs even when Carburetor is purchased.
Financial Disadvantage of $ 178560.00 if Carburetor is purchased from outside.
Answer 1b
The Supplier's Offer should be Rejected, since it has higher cost than Manufacturing.
Answer 2a
Statement of Cost Analysis
Make
Buy
Incremental (cost) or benefit
Purchase Price
$ -
$ 676,800.00
$ (676,800.00)
Direct Material
$ 187,200.00
$ -
$ 187,200.00
Direct labor
$ 216,000.00
$ -
$ 216,000.00
Variable Manufacturing Overheads
$ 43,200.00
$ -
$ 43,200.00
Fixed Manufacturing Overheads, Traceable
$ 129,600.00
$ 77,760.00
$ 51,840.00
Fixed Manufacturing Overheads, Allocated
$ 244,800.00
$ 244,800.00
$ -
$ 820,800.00
$ 999,360.00
$ (178,560.00)
Total Extra cost in Buying carbonator
$ (178,560.00)
Less: Benefit to be achieved by accepting offer
$ 191,560.00
Net (Cost) or benefit by acceptance of offer
$ 13,000.00
Net Financial Advantage of Accepting the offer will be $13000.00.
Answer 4
The Offer should be Accepted Since Additional cost of Accepting offer is lower than additional benefits archived by accepting the offer.
Answer 1a
Statement of Cost Analysis(14400 Units)
Make
Buy
Incremental (cost) or benefit
Purchase Price
$ -
$ 676,800.00
$ (676,800.00)
Direct Material
$ 187,200.00
$ -
$ 187,200.00
Direct labor
$ 216,000.00
$ -
$ 216,000.00
Variable Manufacturing Overheads
$ 43,200.00
$ -
$ 43,200.00
Fixed Manufacturing Overheads, Traceable*
$ 129,600.00
$ 77,760.00
$ 51,840.00
Fixed Manufacturing Overheads, Allocated
$ 244,800.00
$ 244,800.00
$ -
$ 820,800.00
$ 999,360.00
$ (178,560.00)
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