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 of ered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $24 per unit. To evaluate this offer. Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally 14 Per Units Unit Per Year Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated S 5 $ 72,000 7 100,800 4 57,600 9 129,600 9 129,600 Total cost s 34 $489,600 40% supervisory salaries, 60% depreciation of special equpment (no resale value). Required: 1a. Assuming that the company has no alternative use for the faclities that are now being used to produce the carburetors, compute the total cost of making and buying the parts, (Round your F manufacturing overhead per unit rate to 2 decimals.) Total relevant cost (14.400 units) 1b. Should the outside supplier's offer be accepted? Accept Reject 2a. Suppose that if the carburetors were purchased, Troy Engines Lid, could use the freed capacity to launch a new product. The segment margin of the new product would be $73.360 per year Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit Total relevant cost ( 1 n Shouls Teoy Engines LtS,accopt the offer to buy the carburetors for $24 per unir? lype here to search

Answer 1

1
	Per unit differential costs		14,400 units
	Make	Buy	Make	Buy
Cost of purchasing		$            24.00		$ 360,000.00
Direct materials	$               5.00		$    72,000.00
Firect labor	$               7.00		$ 100,800.00
Variable manufacturing overhead	$               4.00		$    57,600.00
Fixed manufacturing overhead traceable	$               3.60		$    51,840.00
Fixed manufacturing overhead common
Total costs	$            19.60	$            24.00	$ 282,240.00	$ 360,000.00
Difference in favour of continuing to make parts	4.4		77760
Only the supervisory salaries can be avoided if the carburetors are purchased. The remaining book value of the special equipment is a sunk cost hence, the $5.4 per unit depreciation expense is not relevant to this decision. Based on these data, the company should reject the offer and should continue to produce the carburetors internally.
								So	make	buy
								1-a	$ 282,240.00	$ 360,000.00
1-b	reject
2
	Make	Buy
Cost of purchasing(part 1)		$ 360,000.00
Cost of making(part 1)	$ 282,240.00
Opportunity cost-segment margn forgone on potential
new product line	$    73,360.00
Total Cost	$ 355,600.00	$ 360,000.00
Difference in favour of making instead purchase	$                                 (4,400.00)
Thus, the company should not accept the offer and purchase the parts from the outside supplier.
so
2-a	$ 355,600.00	$ 360,000.00
2-b	reject