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 $32 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: 15,400 Units Per Unit Per Year Direct materials $9 S 138,600 Direct labor 169,400 Variable manufacturing overhead 46,200 Fixed manufacturing overhead, traceable 92,400 Fixed manufacturing overhead, allocated 200,200 Total cost $ 646,800 $ 42 *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) 1b. Should the outside supplier's offer be accepted? O Reject O Accept 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 $119,640 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) Compute total cost of making and buying :

1b) Outside supplier's offer should be rejected..

2a) Calculate total relevant cost :

2b) Outside supplier's offer should be rejected..

Make Buy Direct material 138600 Direct labour 169400 Variable overhead 46200 Purchase cost 492800 Total relevant cost 354200 492800

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