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 S30 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 14,900 Per Units Unit Per Year $ 9 $134,100 11 163,900 14,900 6* 89,400 13 193,700 Total cost $ 40 $596,000 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 Bu Total relevant cost (14,900 units) 1b. Should the outside supplier's offer be a ccepte O Accept O Reject 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 $116,340 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.) Make Bu Total relevant cost (14,900 units) 2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $30 per unit? O Accept O Reject

Explanation / Answer

.1 a calculation of the relevant cost account description per unit total cost for 14500 units ( 14500 * cost per unit ) direct materials 9 130500 direct labor 11 159500 variable manufacturing overheads 1 14500 fixed manufacturing overheads traceable 2.4 34800 total relevant cost of manufacturing 339300 cost of buy number of units * cost per unit 14500 * 30 435000 .1 b answer reject the offer shall be rejected as the relevant cost of manufacture is less than the cost of buying .2 a calculation of cost of making and buying the parts account description make buy cost of purchasing 435000 cost of manufacturing 339300 opportunity cost using capacity 116340 total cost 455640 435000 .2 b answer accept the offer shall be accepted as the relevant cost of manufacture is higher than the cost of buying

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