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 $42 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 $181,360 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 $42 per unit?

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 $42 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

1a)

Total Relevent cost = Direct material cost + Direct labor cost + Variable manufacturing OH + Cost of Supervisory salary

Total Relevent cost =$202,800 + 234,000 + 15,600 + (93,600*40%)

Total Relevent cost =$489,840

1b)

Cost per unit = $489,840 / 15,600 = $31.4

Cost of producing internally is lower than cost of purchasing therefore the offer should be rejected

2a)

Relevent cost = ($42 * 15,600 ) + (93600 * 60%) = $711,360

2b)

Accept

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