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 $44 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

$

13   

$

188,500  

  Direct labor

15   

217,500  

  Variable manufacturing overhead

3   

43,500

  Fixed manufacturing overhead, traceable

6*  

87,000  

  Fixed manufacturing overhead, allocated

17   

246,500

  Total cost

$

54   

$

783,000

*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.)

    

      

1b.

Should the outside supplier’s offer be accepted?

   

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 $160,700 per year. Compute the total cost of making

and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

   

      

2b.

Should Troy Engines, Ltd., accept the offer to buy the carburetors for $44 per unit?

   

Reject

Accept

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 $44 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered

the following information relating to its own cost of producing the carburetor internally:

Explanation / Answer

1-a.

1-b. Outside supplier's offer should be rejected.

2-a.

2b. Troy Engines Ltd. should accept the offer.

Make Buy $ $ Total variable costs of making 449,500 Avoidable expenses ( $ 87,000 x 40%) 34,800 Purchase cost 638,000 Total cost 484,300 638,000

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