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 $36 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.)

    

      

    

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 $142,320 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 $36 per unit?

Per Unit 14,800 Units
Per Year   Direct materials $ 9    $ 133,200     Direct labor 11    162,800     Variable manufacturing overhead 4    59,200   Fixed manufacturing overhead, traceable 9*   133,200     Fixed manufacturing overhead, allocated 13    192,400   Total cost $ 46    $ 680,800

Explanation / Answer

SOLUTION

1A. Total relevant cost for 14,800 units-

Make - 14,800 * 27.60 = $408,480

Buy -  14,800 * 36 = $532,800

** Only the supervisory salaries can be avoided if the carburetors are purchased. The remaining book value of the special equipment is a sunk cost; hence, the $5.40 per unit depreciation expense is not relevant to this decision.

1B.Order should be rejected.

2A.

2B. Yes, it should be accepted.

Make per unit ($) Buy per unit ($) Cost of purchasing 36.00 Direct materials 9.00 Direct labor 11.00 Variable manufacturing overhead 4.00 Fixed manufacturing overhead, traceable ** (9*40%) 3.60 Fixed manufacturing overhead, common 0 Total costs 27.60 36.00

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