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 $48 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				14,700 Units Per Year
Direct materials	$	13			$	191,100
Direct labor		15				220,500
Variable manufacturing overhead		4				58,800
Fixed manufacturing overhead, traceable		9*				132,300
Fixed manufacturing overhead, allocated		17				249,900
Total cost	$	58			$	852,600

*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.)

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 $191,280 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 $48 per unit?

Answer 1

1a) Differential analysis

	Make	Buy
Direct material	191100
Direct labour	220500
Variable manufacturing overhead	58800
Fixed manufacturing overhead, traceable	132300	79380
Fixed manufacturing overhead, allocated	249900	249900
Purchase Cost (14700*48)		705600
Total relevant Cost	852600	1034880

1b) Reject

2a) Differential analysis

	Make	Buy
Direct material	191100
Direct labour	220500
Variable manufacturing overhead	58800
Fixed manufacturing overhead, traceable	132300	79380
Fixed manufacturing overhead, allocated	249900	249900
Opportunity Cost	191280
Purchase Cost (14700*48)		705600
Total relevant Cost	1043880	1034880

2b) Accept