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 $33 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated 15,200 Per Units Unit Per Year $ 9 $136,800 11 167,200 1 15,200 9* 136,800 13 197,600 Total cost 43 $653,600 *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 (15,200 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 accepted..

Make Buy Direct material 136800 Direct labour 167200 Variable overhead 15200 Fixed overhead 54720 Purchase cost 501600 Total relevant cost 373920 501600

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