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 produce and sell one type of carburetor to Troy Engines Ltd. for a cost of $54.5 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 22,500 Units Unit per Year $ 16 $ 360,000 15 337,500 8180,000 Fixed manufacturing overhead, traceable 13.5 303,750 14 315,000 Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead, allocated Total cost $66.5 $1,496,250 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) 1-b. Should the outside supplier's offer be accepted? Yes No

Explanation / Answer

1a Make Buy Direct materials 16 Direct labour 15 Variable manufacturing overhead 8 Fixed manufacturing overhead,traceable 4.5 Purchase cost 54.5 Total differential cost(per unit) 43.5 54.5 1b No, it should not be accepted 2a Make Buy Total cost 978750 1226250 Opportunity cost 300000 Total differential cost 1278750 1226250 2b Yes, it should be accepted

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