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 $99.0 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 39,000 Units per Year 22 $ 858,000 26 1,014,000 Unit Direct materials Direct labour $ 741,000 Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated 19 30.0* 1,170,000 975,000 25 $122.0 $4,758,000 Total cost *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). Required: 1-a. Compute the total differential cost per unit for producing and buying the product. (Round your answers to 1 decimal places.) Answer is not complete. Make Buy Total differential cost (per unit)

Answer 1

1a) Differential analysis

	Make	Buy
Direct material	22
Direct labor	26
Variable overhead	19
Fixed overhead	10
Purchase cost		99
Total differential cost (per unit)	77	99

1b) No

2a) Differential analysis

	Make	Buy
Direct material	858000
Direct labor	1014000
Variable overhead	741000
Fixed overhead (1170000/3)	390000
Purchase cost (39000*99)		3861000
Opportunity Cost	900000
Total differential cost	3903000	3861000

2b) Yes