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 $48 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:

15,900 Units Per Year

Direct materials $ 206,700

Direct labor $238,500

Variable manufacturing overhead $ 63,600

Fixed manufacturing overhead, traceable * $143,100

Fixed manufacturing overhead, allocated $270,300

Total cost $ 922,200

*40% supervisory salaries; 60% depreciation of special equipment (no resale value).

1 )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?

2)

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 $216,160 per year. Compute the total cost of making and buying the part

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 $216,160 per year. Compute the total cost of making and buying the part

Explanation / Answer

Ans 1 - The total cost of making the parts is $922200 and the total cost of buying the parts is 48 x 15900 = $763200. There are no opportunity cost as there is no alternate use of the facility.

Ans 2 - The total cost of making the product will be 922200 + 216160 = $1138360. And the total cost of buying the parts is 763200 - 216160 = $547040

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