Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment
ID: 2573278 • Letter: T
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 $36 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:
*40% supervisory salaries; 60% depreciation of special equipment (no resale value).
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.
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 $139,840 per year. Compute the total cost of making and buying the parts.
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 $36 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:
Explanation / Answer
1-
per unit differential cost
15100
Make
Buy
make
Buy
cost of purchasing
36
543600
Direct material
9
135900
Direct labor
11
166100
Variable manufacturing overheads
4
60400
Fixed manufacturing overhead traceable
3.6
54360
Fixed manufacturing overhead common
0
total cost
27.6
36
416760
543600
Difference in favor of continuing to make the carburetors
8.4
126840
company should produce the carburetor internally
Supervisory salary can be avoided and depreciation cost is irrelevant as book value of equipment is sunk cost
9*40% = 3.6
3.6
2-
make
buy
cost of purchasing
543600
cost of making
416760
opportunity cost- segment margin foregone on a new potential product line
139840
total cost
556600
543600
difference in favor of purchasing of carburetor
-13000
company should accept the purchase order of carburetor
1-
per unit differential cost
15100
Make
Buy
make
Buy
cost of purchasing
36
543600
Direct material
9
135900
Direct labor
11
166100
Variable manufacturing overheads
4
60400
Fixed manufacturing overhead traceable
3.6
54360
Fixed manufacturing overhead common
0
total cost
27.6
36
416760
543600
Difference in favor of continuing to make the carburetors
8.4
126840
company should produce the carburetor internally
Supervisory salary can be avoided and depreciation cost is irrelevant as book value of equipment is sunk cost
9*40% = 3.6
3.6
2-
make
buy
cost of purchasing
543600
cost of making
416760
opportunity cost- segment margin foregone on a new potential product line
139840
total cost
556600
543600
difference in favor of purchasing of carburetor
-13000
company should accept the purchase order of carburetor
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