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 internally:

  

	Per Unit			30,000 Units per Year
Direct materials	$	19		$	570,000
Direct labour		20			600,000
Variable manufacturing overhead		13			390,000
Fixed manufacturing overhead, traceable		21.0	*		630,000
Fixed manufacturing overhead, allocated		19			570,000
Total cost	$	92.0		$	2,760,000

*	One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value)

1-a.	Compute the total differential cost per unit for producing and buying the product.

	make	buy
total differential cost(per unit)

2-a.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

Answer 1

1a) Differential Cost per unit

	Make	Buy
Direct material	19
Direct labor	20
Variable manufacturing overhead	13
Fixed manufacturing overhead, traceable (21/3)	7
Purchase cost		75
Total differential cost per unit	59	75

2a) Differential Cost

	Make	Buy
Direct material	19*30000 = 570000
Direct labor	20*30000 = 600000
Variable manufacturing overhead	13*30000 = 390000
Fixed manufacturing overhead, traceable (21/3)	7*30000 = 210000
Opportunity Cost	500000
Purchase cost		75*30000 =
Total differential cost per unit	2270000	2250000