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 $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:

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.

Total relevant cost 1,500 units: Make___ Buy___

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 $150,000 per year. Compute the total cost of making and buying the parts.

Total relevant cost 1,500 units: Make___ Buy___

Should Troy Engines, Ltd., accept the offer to buy the carburetors for $35 per unit?

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 $35 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

1a Per unit 15000 units Make Buy Make Buy Direct materials 14 210000 Direct labor 10 150000 Variable manufacturing overhead 3 45000 Fixed manufacturing overhead, traceable 2 30000 Purchase cost 35 525000 Total relevant cost 435000 525000 b Reject 2a Make Buy Total cost 435000 525000 Opportunity cost 150000 Total relevant cost 585000 525000 b Accept

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