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: 20,000 Units Per Year Per Unit $17 $ 340,000 220,000 60,000 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost 60,000 120,000 $ 40 $ 800,000 6 One-third supervisory salaries, two-thirds depreciation of special equipment (no resale value)

Answer 1

1
	Per unit		Total 20000 units
	Make	Buy	Make	Buy
Direct materials	17		340000
Direct labor	11		220000
Variable manufacturing overhead	3		60000
Fixed manufacturing overhead traceable	1		20000
Purchase cost		35		700000
Total			640000	700000
Difference in favor of making = 640000-700000 = $60000
Financial (disadvantage) (60000)
2
Reject the offer
3
	Make	Buy
Total cost	640000	700000
Opportunity cost	200000
Total relevant cost	840000	700000
Difference in favor of buying = 840000-700000 = $140000
Financial advantage 140000
4
Accept the offer