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 S35 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 15,000 Per Units Unit Per Year $ 14 $210,000 10 150,000 45,000 6* 90,000 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 Make Buy Total relevant cost (15,000 units)

Explanation / Answer

1a) compute cost of make or buy :

1b) Company should manufactured the product.

2a) compute cost of make or buy :

2b) Company should Buy the product.

Make Buy Direct material 210000 Direct labour 150000 Variable overhead 45000 Fixed overhead 30000 Purchase costt 525000 Total relevant cost 435000 525000

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