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 $34 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		15,400 Units Per Year
Direct materials	$	9	$	138,600
Direct labor		11		169,400
Variable manufacturing overhead		2		30,800
Fixed manufacturing overhead, traceable		9*		138,600
Fixed manufacturing overhead, allocated		13		200,200
Total cost	$	44	$	677,600

*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.)

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	Make	Buy
Total relevant cost (15,400 units)

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1b.	Should the outside supplier’s offer be accepted? accept or 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 $137,360 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

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	Make	Buy
Total relevant cost (15,400 units)

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2b.	Should Troy Engines, Ltd., accept the offer to buy the carburetors for $34 per unit? reject or accept?

Answer 1

1a) Total relevant cost :

	Make	Buy
Direct material	138600
Direct labour	169400
Variable manufacturing overhead	30800
Fixed manufacturing overhead (138600*40%)	55440
Purchase cost (15400*34)		523600
Total	394240	523600

1b) Outside supplier's offer should be rejected

2a) Total relevant cost :

	Make	Buy
Direct material	138600
Direct labour	169400
Variable manufacturing overhead	30800
Fixed manufacturing overhead (138600*40%)	55440
Opportunity cost	137360
Purchase cost (15400*34)		523600
Total	531600	523600

2b) Outside supplier's offer should be accepted