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 $45 per unit. To evaluate this offer. Troy Engines. Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: 40% supervisory salaries: 60% depreciation of special equipment (no resale value). 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.) Should the outside supplier's offer be accepted? Accept Reject 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 $199,720 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 $45 per unit? Accept Reject

Explanation / Answer

1a) Particulars Make Buy Direct material 198900 0 Direct labour 229500 0 Variable manufactuing overhead 15300 0 Fixed manufacturing overhead traceble 137700 0 Total cost 581400 688500 Fixed manufacturing overhead ,allocated , supervisor salary and depreciation of the special equipment is not taken for the calculation because these are irrelevant cost as they will be incurred irrespective whether the company manufacture or buy. 1b) No, as the company can manufacture it with less cost.Company should not accept the outside supplier's offer 2a) Particulars Make Buy Direct material 198900 0 Direct labour 229500 0 Variable manufactuing overhead 15300 0 Fixed manufacturing overhead traceble 137700 0 Opportunity cost 199720 Total cost 781120 688500 Opportunity cost is the margin lost on the production of new product if the company uses the time to produce the carburetor. 2b) Yes, the company should accept offer to buy the carburetor for $45 per unit.

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