Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment
ID: 2474770 • Letter: T
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 units per year 15 700
Fixed manufacturing overhead, allocated
204,100
total cost 43 675,100
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.
total relevant costs (15700 units) make ? buy 518,100
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 $117,620 per year. Compute the total cost of making and buying the parts.
total relevant costs of (15 700 units) make ? buy?
Direct materials $ 9 $ 141,300 Direct labor 11 172,700 Variable manufacturing overhead 4 62,800 Fixed manufacturing overhead, traceable 6* 94,200Fixed manufacturing overhead, allocated
13204,100
Explanation / Answer
1. if no alternative use of the facilities, calculation of relevant cost:
As the cost of manufacturing is less than purchase cost. So the product should be manufactured.
Pls note that only the exp which wouldnt be incurred if the product is not manufactured would be considered. Other fixed cost wouldnt be considered while decision making as it will be same under both the options
2. When Alternative is available, relevant cost will be:
As the cost of purchasing is less than the manufacturing cost. So product should be purchased
Particulars Manufacturing cost Buying cost Direct Material 141300 Direct labor 172700 Variable manufacturing overheads 62800 Supervisory Salaries (40% of 94200) 37680 Purchase cost 518100 Total relevant cost 414480 518100Related Questions
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