Exercise 10-3 Make or Buy a Component [LO10-3] Troy Engines, Ltd., manufactures
ID: 2583588 • Letter: E
Question
Exercise 10-3 Make or Buy a Component [LO10-3]
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 $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:
Per Unit 15,000 Units
Per Year
Direct materials $ 14 $ 210,000
Direct labor 10 150,000
Variable manufacturing overhead 3 45,000
Fixed manufacturing overhead, traceable 6* 90,000
Fixed manufacturing overhead, allocated 9 135,000
Total cost $ 42 $ 630,000
*One-third supervisory salaries; two-thirds 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.
1b. Should the outside supplier’s offer be accepted?
Accept
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 $150,000 per year. Compute the total cost of making and buying the parts.
2b.
Should Troy Engines, Ltd., accept the offer to buy the carburetors for $35 per unit?
Accept
Reject
Explanation / Answer
Per unit Total 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 cost 435000 525000 1b Reject 2a Make Buy Cost as above 435000 525000 Opportunity cost 150000 Total cost 585000 525000 2b Accept
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