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 $22 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor inte rnally: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated 15,400 Per Units Unit Per Year $5 $ 77,000 7 107,800 2 30,800 9* 138,600 9 138,600 Total cost $ 32 $492,800 "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 (15,400 units) $237,160$277,200 1b. Should the outside supplier's offer be accepted? O Accept Reject 2a. 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 $77,760 per year. 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 (15,400 units)

Explanation / Answer

1a Per unit Total Make Buy Make Buy Direct materials 5 77000 Direct labor 7 107800 variable manufacturing overhead 2 30800 Fixed manufacturing overhead,traceable 3.6 55440 Purchase cost 22 338800 271040 338800 Make Buy Total relevant cost 271040 338800 b reject 2a Make Buy Total cost 271040 338800 Opportunity cost 77760 Total relevant cost 348800 338800

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