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 $34 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 15,300 Units Per Year Direct materials $ 9 $ 137,700 Direct labor 11 168,300 Variable manufacturing overhead 2 30,600 Fixed manufacturing overhead, traceable 9* 137,700 Fixed manufacturing overhead, allocated 13 198,900 Total cost $ 44 $ 673,200 *40% supervisory salaries; 60% depreciation of special equipment (no resale value).

Explanation / Answer

Solution:

AS buying cost is higher than making cost, therefore company should make the carburetor.

Differential Analysis- Troy Engineers 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 (15300*$34) $0.00 $520,200.00 -$520,200.00 Direct material $137,700.00 $0.00 $137,700.00 Direct Labor $168,300.00 $0.00 $168,300.00 Variable overhead $30,600.00 $0.00 $30,600.00 Avoidable Fixed Overhead ($137,700*40%) $55,080.00 $0.00 $55,080.00 Total Cost $391,680.00 $520,200.00 -$128,520.00

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