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 $44 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: 15,900 Per Units Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Unit Per Year $ 13 $206,700 15 238,500 3 47,700 6 95,400 17 270,300 Total cost 54 $858,600 *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 (15,900 units) 1b. Should the outside supplier's offer be accepted? O Reject O Accept

Explanation / Answer

1a) Calculate total relevant cost :

1b) Reject, Outside supplier's offer should be reject

2a) Calculate total relevant cost :

2b) Accept, Outside supplier's offer should be accept

Make Buy Direct material 206700 Direct labour 238500 Variable manufacturing overhead 47700 Fixed manufacturing overhead 38160 Purchase cost 699600 Total 531060 699600

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