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		14,600 Units Per Year
Direct materials	$	9	$	131,400
Direct labor		11		160,600
Variable manufacturing overhead		4		58,400
Fixed manufacturing overhead, traceable		9*		131,400
Fixed manufacturing overhead, allocated		13		189,800
Total cost	$	46	$	671,600

*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.)

Make Buy

Total relevant cost (14,600 units)

1b.

Should the outside supplier’s offer be accepted?

	Accept
	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 $131,640 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

   Make Buy

Total relevant cost (14,600 units)

2b.

Should Troy Engines, Ltd., accept the offer to buy the carburetors for $36 per unit?

	Reject
	Accept

Answer 1

1a) Total relevant cost :

	Make	Buy
Direct material	131400
Direct labour	160600
Variable manufacturing overhead	58400
Fixed manufacturing overhead (131400*40%)	52560
Purchase cost (14600*36)		525600
Total relevant cost	402960	525600

1b) Reject

2a) Total relevant cost :

	Make	Buy
Direct material	131400
Direct labour	160600
Variable manufacturing overhead	58400
Fixed manufacturing overhead (131400*40%)	52560
Opportunity cost	131640
Purchase cost (14600*36)		525600
Total relevant cost	534600	525600

2b) Accept