Problem 9-4 Determining Whether to Make or Buy (LO1 - CC4) Troy Engines Ltd. man

Question

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 $107.0 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 42,000 Units Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Unit per Year $ 23 $ 966,000 28 1,176,000 21 882,000 33.0* 1,386,000 Fixed manufacturing overhead, allocated 27 1,134,000 $132.0 $5,544,000 traceable Total cost 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 Total differential cost (per unit 1-b.Should the outside supplier's offer be accepted? Yes No 2-a. 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 $1,030,000 per year Compute the total differential cost in producing and buying the product when the segment margin is foregone on a potential new product line Make Buy Total differential cost 2-b.Should Troy Engines Ltd. accept the offer to buy the carburetors for $107.0 per unit? Yes No

Explanation / Answer

1-a total differential cost per unit

Per unit cost of buying = 107

Per unit of cost of making = diect materials + direct labor + variable manufacturing overhead + fixed manufacturing overhead traceable =(23+28+21+(33*1/3))= 83

(2/3 of fixed manufacturing overhead traceable is not relevant)

1-b No because cost of making lower than cost of buying

2-a differential cost

Making =(42000*83)+1030000= 4516000

Buying = 42000*107= 4494000

2-b Yes because the cost of buying is lower than cost of making

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