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 $43 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				14,200 Units Per Year
Direct materials	$	13			$	184,600
Direct labor		15				213,000
Variable manufacturing overhead		2				28,400
Fixed manufacturing overhead, traceable		6*				85,200
Fixed manufacturing overhead, allocated		17				241,400
Total cost	$	53			$	752,600

*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.)

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 $167,520 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $43 per unit?

	Reject
	Accept

Answer 1

1a) Differential analysis

	Make	Buy
Direct material	184600
Direct labor	213000
Variable manufacturing overhead	28400
Fixed manufacturing overhead, traceable (85200*40%)	34080
Purchase cost (14200*43)		610600
Total relevant cost	460080	610600

1b) Reject

2a) Differential analysis

	Make	Buy
Direct material	184600
Direct labor	213000
Variable manufacturing overhead	28400
Fixed manufacturing overhead, traceable (85200*40%)	34080
Opportunity cost	167520
Purchase cost (14200*43)		610600
Total relevant cost	627600	610600

2b) Accept