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 $44 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	$	13	$	184,600
Direct labor		15		213,000
Variable manufacturing overhead		3		42,600
Fixed manufacturing overhead, traceable		6*		85,200
Fixed manufacturing overhead, allocated		17		241,400
Total cost	$	54	$	766,800

*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?
	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 $169,520 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

   

    

Answer 1

1a
	Per unit		Total 14200 units
	Make	Buy	Make	Buy
Direct materials	13.00		184600
Direct labor	15.00		213000
Variable manufacturing overhead	3.00		42600
Fixed manufacturing overhead traceable	2.40		34080
Purchase cost		44.00		624800
Total			474280	624800
	Make	Buy
Total relevant cost (14,200 units)	474280	624800
1b
No, Reject the offer
2
	Make	Buy
Total cost	474280	624800
Opportunity cost	169520
Total relevant cost (14,200 units)	643800	624800