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:

   

   

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 $152,400 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

   

    

Should Troy Engines, Ltd., accept the offer to buy the carburetors for $33 per unit?

Per Unit 16,000 Units
Per Year   Direct materials $ 9    $ 144,000     Direct labor 11    176,000     Variable manufacturing overhead 1    16,000   Fixed manufacturing overhead, traceable 9*   144,000     Fixed manufacturing overhead, allocated 13    208,000   Total cost $ 43    $ 688,000

Explanation / Answer

1a)

1b )offer should be rejected as there is an incrmental total cost of $ 134400   [822400-688000]

2a)Total cost of manufacturing = 688000

Total cost of buying = 822400 - 152400 = 670000

2b)accept as there is an incremental saving of 18000    [688000-670000]

Manufacture Purchase DM 9 DL 11 VOH 1 FOH 9 5.4    [9*.60 as supervisory salary wil be avoided ] FOH -allocated 13 13 Purchase cost 3 3 Per unit cost 43 51.4 Total cost 688000 822400    [51.4*16000]

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