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 $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: $ Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated 15,700 Per Units Unit Per Year 9 $ 141,300 11 172,700 3 47.100 9* 141,300 13 204,100 Total cost $ 45 $706,500 *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.) Make Buy 549,500 Total relevant cost (15,700 units) $ 1b. Should the outside supplier's offer be accepted? Reject O 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 $140,880 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

1. A) .

	Make	Buy
Total Relevant Cost (15,700 Units)	$417,620	$549,500

B ). Reject the outside suppliers offer.

Explanation 1.

	Per Unit Differential Cost	15,700 Unit
	Make	Buy	Make	Buy
Cost of Purchasing		$35		$549,500
Direct Materials	$9		$141,300
Direct Labor	$11		$172,700
Variable Manufacturing Overhead	$3		$47,100
Fixed Manufacturing Overhead, Traceable *	$3.6		$56,520
Fixed Manufacturing Overhead, common
Total Cost	$26.6	$35	$417,620	549,500
Difference in favour of Continuing Making	$ 8.4	$ 131,880

* Only the supervisory salaries can be avoided if the carburetors are purchased. The remaining book value of the special equipment is a sink cost hence the depreciation expense is not relevant to decision.

Based on these data the company should reject offers and should continue to produce the carburators internally .

2.A)

	Make	Buy
Total Relevant Cost ( 15,700 Unit)	$558,500	$549,500

Explanation;  

	Make	Buy
Cost of Purchasing		$549,500
Cost of Making	$417,620
Opportunity Cost - Segment margin forgone on a potential new product line	$140,880
Total Cost	$558,500	$549,500
Difference in favour of purchasing from the out side supplier	$ 9,000