Question

Exercise 12-3 Make or Buy a Component [LO12-3]

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 $22 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		15,900 Units Per Year
Direct materials	$	5	$	79,500
Direct labor		7		111,300
Variable manufacturing overhead		2		31,800
Fixed manufacturing overhead, traceable		9*		143,100
Fixed manufacturing overhead, allocated		9		143,100
Total cost	$	32	$	508,800

*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?

	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 $87,960 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 $22 per unit?

	Accept
	Reject

Answer 1

1
	Per unit		Total 15900 units
	Make	Buy	Make	Buy
Direct materials	5		79500
Direct labor	7		111300
Variable manufacturing overhead	2		31800
Fixed manufacturing overhead traceable	3.6		57240
Purchase cost		22		349800
Total			279840	349800
	Make	Buy
Total relevant cost	279840	349800
1b
Reject
2a
	Make	Buy
Total cost	279840	349800
Opportunity cost	87960
Total relevant cost	367800	349800
2b
Accept