Troy Engines, Ltd., manufactures a variaty of engines for use in heavy equipment

Question

Troy Engines, Ltd., manufactures a variaty of engines for use in heavy equipment. The company has always produced all of the necessary parts for its supplier has offered to sell one type of carburetor to Troy Engines, Ltd, for a cost of $34 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor intemally ncluding all of the carburetors. An outside 15,800 Direct materials Direct labor Variable manufacturing overhead Foxed manufacturing overhead, traceable Fored manufacturing overhead, allocated Total cost Per Units Unit Per Year 5 9 5142,200 11 173,800 2 31,800 142,200 13 205,400 5 44 S695,200 "40% supervisory salanes,80% depreciation of special equipment (no resale value). Required a. 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.) Total relevant cost (15,800 units b. Should the outside supplier's offer be accepted? O Accept O 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 $143,720 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.) Total relevant cost (15,800 units 2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for 534 per unit? O Reject O Accept

Explanation / Answer

1 a.

Note ....... Allocated fixed overhead and depreciation of equipment that had no sale value are not relevant costs. They are not effected by any decision that is taken.

1 b.

Reject

Cost of making is lower than buying the product

2.b

2. b

Accept

Make Buy Material 142200 Labor 173800 Variable 31600 Fixed traceable (40%) 56880 buy = 15800*34 537200 Relevant cost 404480 537200

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