Troy Engines, Ltd., manufactures a vanety of engines for use in heavy equipment.

Question

Troy Engines, Ltd., manufactures a vanety 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 $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor intern ally: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated 14,900 Per Units Unit Per Year $9 $134,100 11 163,900 344,700 9* 134,100 13 193,700 Total cost $ 45 $670,500 "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 (14,900 units)

Explanation / Answer

Troy Engines Limited All Amounts in $ 1a. Relevant Cost of Make or Buy in Current Scenario Cost for Making the Product for 14,900 units Per Unit Direct Materials 134100 9 Direct Labor 163900 11 Variable Manufacturing Overheads 44700 3 Traceable Fixed Manufacturing Overheads Supervisory Salaries 53640 3.60 Depreciation of Special Equipment 80460 5.40 Fixed Manufacturing Overhead, Allocated 193700 13.00 670500 45 Cost of Buying the Product For 14,900 Units 521500 35 1b. If the margin from the free product is utilised Cost for Making the Product 670500 45 (this remains constant) Cost of Buying the Product 521500 Less : Margin of New Product 131160 Net Cost of Buying the Product 390340 26.20

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