Exercise 10-3 Make or Buy a Component [LO10-3] Troy Engines, Ltd., manufactures

Question

Exercise 10-3 Make or Buy a Component [LO10-3] 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 $23 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: 15,000 Per Units Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Unit Per Year $ 5 $ 75,000 7 105,000 345,000 9* 135,000 9 135,000 Total cost $ 33 $495,000 "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 Total relevant cost (15,000 units)

Explanation / Answer

1a) Total relevant cost :

2a) Total relevant cost :

Make Buy Direct material 75000 Direct labour 105000 Variable manufacturing overhead 45000 Fixed manufacturing overhead (135000*40%) 54000 Purchase cost (15000*23) 345000 Total relevant cost 279000 345000

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