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 produce and sell one type of carburetor to Troy Engines Ltd. for a cost of $75.0 per unit. To evaluate this offer, Troy Engines Ltd. has gathered the following information relating to its own cost of producing the carburetor intenally: Per 30.000 Usits Unit per Year $ 19 S 570,000 20 600,000 13 30000 Fxed manufacturing overhead, traceale 21.0 630,000 Direct materials Direct labour Variable manufacturing overhead Faxed manufacturing overhead, allocated Total cost $2.0 $2,760,000 One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). Required: 1 Compute the total differential cost per unit for producing and buying the product. (Round your answers to 1 decimal places.) Make Buy Total diferental cost per unit 1Should the outside supplier's offer be accepted? Yes No 2 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 $500,000 per year. Compute the total differential cost in producing and buying the product when the segment margin is foregone on a potential new product line. Make Buy Total differential cost 2Should Troy Engines Ltd. accept the offer to buy the carburetors for $75.0 per unit? O Yes No

Answer 1

Answer with working is given below

Evaluation of Make Vs Buy Cost to Cost to Make Buy $570,000 $600,000 $390,000 $630,000 Direct Material Direct Labor Variable Manfacturing Oerhead Fixed Manufacutirng Overhead Traceable Buying Cost Total Costs Tota Units Cost per Unit $2,250,000 $2,190,000 $2,250,000 30,000 $73.0 30,000 $75.0 Note- Allocated cost is not relevant for Make vs Buy decision 1 a) Total Differential cost per unit Make Buy $75.0 $73.0 1 b) outside supplier offer should not be accepted since cost to make internally is cheaper Evaluation of Make Vs Buy Cost to Cost to Make Buy Direct Material Direct Labor Variable Manfacturing Oerhead Fixed Manufacutirng Overhead - Traceable Buying Cost Total Costs Add: Segment margin forgone on a potential new product line Total Cost Tota Units Cost per Unit $570,000 $600,000 $390,000 $630,000 $2,250,000 $2,190,000 $2,250,000| $500,000 $2,690,000 $2,250,000 30,000 $89.7 30,000 $75.0 2 a) Make Buy $75.0 Total Differential cost per unit $89.7 2 b) Yes the external supplier offer should be accepted