6 value: 0.00 points Problem 9-4 Determining Whether to Make or Buy (LO1 - CC4)

Question

6 value: 0.00 points Problem 9-4 Determining Whether to Make or Buy (LO1 - CC4) 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 produce and sell one type of carburetor to Troy Engines Ltd. for a cost of $78.5 per unit. To evaluate this offer, Troy Engines Ltd. has gathered the following information relating to its own cost of producing the carburetor internally: Per 31,500 Units Unit per Year $ 19 S 598,500 21 661,500 14 441,000 Fixed manufacturing overhead, traceable 22.5 708,750 20 630,000 Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead, allocated Total cost $96.5 $3,039,750 One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). Required 1-a. Compute the total differential cost per unit for producing and buying the product. (Round your answers to 1 decimal places.) Make Buy Total differential cost (per unit) 78.5

Explanation / Answer

1.a) Total differential cost per unit if it makes:

Particulars $

Direct Materials 19.0

Direct Labours 21.0

Variable Mfg O/H 14.0

Fixed Mfg O/H Traceable 22.5

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Total Cost 76.5

Fixed mfg O/H cost (tracebale) are relevant as they are related to the specific activity hence to be considered.

Fixed mfg O/H cost (allocated) are irrelevant in the decision as presumptively they will be incurred in either case.

1.b) As cost of making the product inhouse is lesser than buying cost of supplier by $2 per unit, the Company should not accept the suppliers offer as it will result in loss of $ 63,000 per year.

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