please complete all Exercise 12-3 Make or Buy a Component [L012-3] Troy Engines,

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Exercise 12-3 Make or Buy a Component [L012-3] 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: 14,700 Per Units Unit Per Year Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated S 13 $191,100 15 220,500 4 58,800 9 132,300 17 249,900 Total cost $ 58 $852,600 "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.) Make Buy Total relevant cost (14,700 units) 1b. Should the outside supplier's offer be accepted? Reject O Accept

Explanation / Answer

Answer:1 a)

Calculation of total relevant cost:

Working note:

Fixed MOH, traceable = $9*40% = $3.60

Answer: 1 b)

Outside supplier's offer should be rejected because cost of buying is $12.40 more than cost of making internally. ($48- $35.60)

Answer: 2 a)

Now, the total relevant cost of making internally = 523320 + 195280 = $718600

Relavant cost of buying = $705600

Answer: 2 b)

Now, the Troy engines Ltd. should accept the offer as the relevant cost of buying is less than of making it internally.

Make Buy Per unit 14700 units per year Per unit 14700 units Purchase price $           -   $                                       -   $             48.00 705600 Direct materials $    13.00 $                    1,91,100.00 Direct labor $    15.00 $                    2,20,500.00 Variable MOH $       4.00 $                        58,800.00 Fixed MOH, traceable $       3.60 $                        52,920.00 Total cost $    35.60 $                    5,23,320.00 $             48.00 705600

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