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 14,200 Units Per Year Direct materials $ 9 $ 127,800 Direct labor 11 156,200 Variable manufacturing overhead 4 56,800 Fixed manufacturing overhead, traceable 9* 127,800 Fixed manufacturing overhead, allocated 13 184,600 Total cost $ 46 $ 653,200 *40% supervisory salaries; 60% depreciation of special equipment (no resale value).

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? 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 $137,280 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 $36 per unit? Reject Accept

Answer 1

1
	Per unit		Total 14200 units
	Make	Buy	Make	Buy
Direct materials	9		127800
Direct labor	11		156200
Variable manufacturing overhead	4		56800
Fixed manufacturing overhead traceable	3.6		51120
Purchase cost		36		511200
Total			391920	511200
	Make	Buy
Total relevant cost (14200 units)	391920	511200
1b
Reject
2a
	Make	Buy
Total cost	391920	511200
Opportunity cost	137280
Total relevant cost (14200 units)	529200	511200
2b
Accept