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 $47 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? Reject Accept 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 $203,240 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 $47 per unit? Reject Accept

Explanation / Answer

Manufacturing (15100 units)

Assumed : Supervisory salary is avoidable fixed cost. (135900 x 40%)= 54360.

1B. Company should not accept vendor's offer. Since relevan cost of Manufacturing is less than purchasing cost.

2A.

2B. Since relevant cost of purchase is less than manufacturing cost. Thus, Now Purchasing is better option.

Manufacturing (15100 units)

Amount Purchase (15100 units) Amount Material 196300 Purchase cost (47 x 15100) 709700 Labor 226500 Variable overhead 45300 Avoidable fixed cost 54360 TOTAL RELEVANT COST 522460 TOTAL RELEVANT COST 709700

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