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 $45 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		14,500 Units Per Year
Direct materials	$	13	$	188,500
Direct labor		15		217,500
Variable manufacturing overhead		4		58,000
Fixed manufacturing overhead, traceable		6*		87,000
Fixed manufacturing overhead, allocated		17		246,500
Total cost	$	55	$	797,500

*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 $159,700 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 $45 per unit?
	Reject Accept

Answer 1

1a) Differential analysis

	Make	Buy
Direct material	188500
Direct labor	217500
Variable manufacturing overhead	58000
Fixed manufacturing overhead, traceable (87000*40%)	34800
Purchase cost (14500*45)		652500
Total relevant cost	498800	652500

Financial (disadvantage) = -153700

1b) Reject

2a) Differential analysis

	Make	Buy
Direct material	188500
Direct labor	217500
Variable manufacturing overhead	58000
Fixed manufacturing overhead, traceable (87000*40%)	34800
Opportunity Cost	159700
Purchase cost (14500*45)		652500
Total relevant cost	658500	652500

Financial advantage = 6000

2b) Accept