Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment
ID: 2483110 • 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 $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:
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 (14,500 units)
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 $196,800 per year. 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 (14,500 units)
Should Troy Engines, Ltd., accept the offer to buy the carburetors for $45 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 $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:
Explanation / Answer
Answer 1.a. Calculation of Total Costs Make Buy Cost of Purchasing (14500 Units X $45) 652,500 Relevant Cost Direct Materials - 14500 Units X $13 188,500 Direct Labor - 14500 Units X $15 217,500 Variable MOH - 14500 Units X $1 14,500 Fixed MOH - Traceable (130500 X 40%) 52,200 Total Costs 472,700 652,500 Answer 1.b. Outside Supplier's Offer should be Rejected - As it will decrease the Net Operating Income by $179,800 Answer 2. a. Calculation of Total Costs Make Buy Cost of Purchasing (14500 Units X $45) 652,500 Relevant Cost Direct Materials - 14500 Units X $13 188,500 Direct Labor - 14500 Units X $15 217,500 Variable MOH - 14500 Units X $1 14,500 Fixed MOH - Traceable (130500 X 40%) 52,200 Segment Margin from New product Produced from Free Capacity (196,800) Total Costs 472,700 455,700 Answer 2.b. Outside Supplier's Offer should be Accepted - As it will increase the Net Operating Income by $17,000
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