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 $47 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				14,200 Units Per Year
Direct materials	$	13			$	184,600
Direct labor		15				213,000
Variable manufacturing overhead		3				42,600
Fixed manufacturing overhead, traceable		9*				127,800
Fixed manufacturing overhead, allocated		17				241,400
Total cost	$	57			$	809,400

*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?

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 $195,080 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $47 per unit?

Answer 1

Incremental analysis
			Make	Buy	Effect on Income
Direct material			184600		184600
Direct labor			213000		213000
Variable Mmanufacturing OH			42600		42600
Fixed Manufacturing OH			51120		51120
(9*40% *14200 units)
Purchase cost from supplier				667400	-667400
Total cost			491320	667400	-176080
Hence, Offer must be rejected
Req c:
Incremental analysis:
			Make	Buy	Effect on Income
Direct material			184600		184600
Direct labor			213000		213000
Variable Mmanufacturing OH			42600		42600
Fixed Manufacturing OH			51120		51120
(9*40% *14200 units)
Purchase cost from supplier				667400	-667400
Contribution earned from New product				-195080	195080
Total cost			491320	472320	19000
Hence, offer shall be accepted now.