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 521 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the fol producing the carburetor internally llowing information relating to its own cost of 14,200 PerUnits Unit Per Year Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated 5 5 5 71,000 7 99.400 4 56,800 6 85,200 9 127,800 Total cost 5 31 5440,200 "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 S 298,200 Total relevant cost (14,200 units) 1b. Should the outside supplier's offer be accepted? Accept O Reject 2a. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to aunch a new product. The segment margin of the new product would be $48,920 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 (14,200 units) 2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for S21 per unit? O Accept Reject

Explanation / Answer

1a) Differential analysis :

1b) Reject the offer.

2a) Differential analysis :

2b) Accept the offer.

Make Buy Direct material 71000 Direct labour 99400 Variable manufacturing overhead 56800 Fixed manufacturing overhead (supervisor salary) 34080 Purchase cost 298200 Total 261280 298200

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