Troy Engines Ltd. manufactures a variety of engines tor use in heavy equipm ent.

Question

Troy Engines Ltd. manufactures a variety of engines tor use in heavy equipm ent. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to produce and sell one type of carburetor to Troy Engines Ltd. for a cost of $99.0 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 39,000 Units Unit per Year $ 22 $ 858,000 26 1,014,000 19 741,000 Fixed manufacturing overhead, traceable 30.0 1,170,000 Fixed manufacturing overhead, allocated25975,000 Direct materials Direct labour Variable manufacturing overhead Total cost $122.0 $4,758,000 One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value) Required 1-a. Compute the total differential cost per unit for producing and buying the product. (Round your nswers to 1 decimal places.) Make Buy Total differential cost (per unit) 1-b. Should the outside supplier's offer be accepted? Yes

Explanation / Answer

Per unit 39000.0 unit DM 22.0 858000.0 DL 26.0 1014000.0 Var Manu OH 19.0 741000.0 Fixed OH Traceable 30.0 1170000.0 Fixed OH Allocated 25.0 975000.0 122.0 4758000.0 Make 122.0 Buy 99.0 Differential cost 23.0 Make Buy 1.a Total diff cost 0.0 23.0 1.b Should be accepted Yes 2.a So differential cost is 23.0 Total units 39000 Buy advantage 897000 New product Margin 900000 23.1 Total advantage 1797000 Per unit advantage 46.1 Make Buy Make Buy Total diff cost -900000.0 897000.0 or Total diff cost 0.0 1797000.0 2.b Should be accepted Yes

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