Exercise 12-3 Make or Buy Decision [L012-3] Troy Engines, Ltd., manufactures a v

Question

Exercise 12-3 Make or Buy Decision [L012-3] 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 $30 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: 13,000 Units per Year Unit Year Direct materials Direct labor Variable manufacturing overhead Pixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost 13 169,000 9 117,000 3 39,000 3 39,000 78,000 $34 $442,000 One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value)

Explanation / Answer

Per unit Total Make Buy Make Buy Direct materials 13 169000 Direct labour 9 117000 Variable manufacturing overhead 3 39000 Fixed manufacturing overhead, traceable 1 13000 Purchase cost 30 390000 Total differential cost (per unit) 26 30 338000 390000 Financial disadvantage $52000(390000-338000) 1b No 2a Make Buy Total cost 338000 390000 Opportunity costs 130000 Total differential cost 468000 390000 Financial advantage $78000(468000-390000) 2b Yes

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