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 $35 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		14,500 Units Per Year
Direct materials	$	9	$	130,500
Direct labor		11		159,500
Variable manufacturing overhead		3		43,500
Fixed manufacturing overhead, traceable		9*		130,500
Fixed manufacturing overhead, allocated		13		188,500
Total cost	$	45	$	652,500

*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 $135,800 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 $35 per unit?

Answer 1

Differential analysis
			Make	Buy	Net effect on Income
Direct Mmaterial			130500		130500
Direct Labour			159500		159500
Variable Manufacturing OH			43500		43500
Fixed Manufacturing OH			130500	78300	52200
Cost of Purchasing the parts				507500	-507500
Net Cost			464000	585800	121800
Hence, The part shall be manufacture.
Differential analysis
			Make	Buy	Net effect on Income
Direct Mmaterial			130500		130500
Direct Labour			159500		159500
Variable Manufacturing OH			43500		43500
Fixed Manufacturing OH			130500	78300	52200
Cost of Purchasing the parts				507500	-507500
Contribution earned of new product				-135800	135800
Net Cost			464000	450000	14000
Hence,n the part shall be bought from supplier