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 $36 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		14,400 Units Per Year
Direct materials	$	9	$	129,600
Direct labor		11		158,400
Variable manufacturing overhead		4		57,600
Fixed manufacturing overhead, traceable		9*		129,600
Fixed manufacturing overhead, allocated		13		187,200
Total cost	$	46	$	662,400

*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.)

    

      

1b.	Should the outside supplier’s offer be accepted?
	Reject Accept

    

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 $130,960 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

Answer 1

1a
	Per unit		Total 14400 units
	Make	Buy	Make	Buy
Direct materials	9		129600
Direct labor	11		158400
Variable manufacturing overhead	4		57600
Fixed manufacturing overhead traceable	3.6		51840
Purchase cost		36		518400
Total			397440	518400
	Make	Buy
Total relevant cost (14400 units)	397440	518400
1b
Reject, as cost to buy is more than cost to make
2a
	Make	Buy
Total cost	397440	518400
Opportunity cost	130960
Total relevant cost (14400 units)	528400	518400