Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment
ID: 2517368 • 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 $35 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.
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 $150,000 per year. Compute the total cost of making and buying the parts.
Should Troy Engines, Ltd., accept the offer to buy the carburetors for $35 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 $35 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 cost of making the parts = Direct materials + Direct labour + Variable manufacturing overhead + Avoidable fixed manufacturing overhead
= (14*15,000) + (10*15,000) + (3*15,000) + [(6*1/3)*15,000]
= 210,000 + 150,000 + 45,000 + 30,000
= 435,000
Total cost of buying the parts = 15,000 * 35 = 525,000
1b.
Reject (as cost of buying is more)
2a.
Total cost of making the parts = Direct materials + Direct labour + Variable manufacturing overhead + Avoidable fixed manufacturing overhead + Contribution margin lost
= (14*15,000) + (10*15,000) + (3*15,000) + [(6*1/3)*15,000] + 150,000
= 210,000 + 150,000 + 45,000 + 30,000 + 150,000
= 585,000
Total cost of buying the parts = 15,000 * 35 = 525,000
2b.
Accept (as cost of buying is less)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.