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 $33 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      14,500 Units
Per Year
Direct materials   $   9    $   130,500
Direct labor      11       159,500
Variable manufacturing overhead      1       14,500
Fixed manufacturing overhead, traceable      9*        130,500
Fixed manufacturing overhead, allocated      13       188,500
   
Total cost   $   43    $   623,500
   
*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.)

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 $136,800 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

Explanation / Answer

COST OF MAKING & BUYING THE PARTS:- Only the supervisory salaries can be avoided if the carburetors are purchased. The remaining book value of the special equipment is a sunk cost

Therefore fixed manufacturing overhead = $ 130500 * 40% = $ 52200

COST OF MAKING AND BUYING THE PARTS IF CARBURETORS WERE PURCHASED.

Total Relevant Cost of Making the Products = $ 356700 + $ 136800(opportunity cost) = $ 493500

Total Cost of Purchasing = $ 478500

PARTICULARS PER UNIT TOTAL COST FOR 14500 UNITS $ $ Direct Materials 9 130500 Direct Labour 11 159500 Variable Manufacturing Overhead 1 14500 Fixed Manufacturing Overhead 52200 TOTAL COST FOR MAKING 356700 Purchase Cost 33 478500 TOTAL BUYING COST 478500

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