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 $31 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor intenally: 15,000 Per Units Unit Per Year Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated $ 9 $135,000 11 165,000 2 30,000 6 90.000 13 195,000 Total cost $ 41 $615,000 "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 Total relevant cost (15,000 units) 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 $113,000 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.) Make Buy Total relevant cost (15,000 units)

Answer 1

1a)

Cost of making the parts = $9(Direct materials) + $11(direct labour) + $2(variable manufacturing overhead) + $6(avoidable fixed cost) = $28/unit

Traceable fixed cost are those fixed which are directly allocated to a particular segment, if that segment cease to exist than no fixed cost shall be incurred.

Cost of purchase = $31/unit

Producing the product is more beneficial

1b) Reject

2a)

Contribution lost/unit = $113,000/15,000unit = $7.53/unit

Relevant cost of production = Total avoidable cost + contribution lost

Relevant cost of production = $28/unit + $7.53/unit = $35.53/unit

Cost of purchase = $31/unit

part should be purchased

2b) Accept