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 internally:

   

		Per Unit		15,000 Units Per Year
Direct materials	$	9	$	135,000
Direct labor		11		165,000
Variable manufacturing overhead		2		30,000
Fixed manufacturing overhead, traceable		6*		90,000
Fixed manufacturing overhead, allocated		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.)

    

      

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 $105,000 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 $31 per unit?
	Accept Reject

Answer 1

Concepts and reason

Cost: The concept of cost in management accounting refers to the amount paid or amount sacrificed to obtain something. The value of all the costs will have to be determined in monetary values. There are various types of costs in cost accounting. Therefore, identification of the costs is a significant task in management decision making.

Direct materials: Direct material costs refer to the cost of raw materials consumed in production activities. The cost of raw materials varies with the level of production. Therefore, the direct material cost is a variable cost. It is the cost of materials that can be easily traced directly to the units of product it manufactures. It is the prime element required for the manufacture of products.

Direct labor costs: Direct labor costs refer to the cost of labor hours consumed in the production activities. The cost incurred for labor hours consumed is directly dependent on the sales volume. Therefore, the direct labor cost is a variable cost.

Variable manufacturing overhead: It is the manufacturing overhead that changes with the volume of production.

Fixed manufacturing overhead: It is the allocated fixed portion of overheads that does not change with the volume of production.

Fundamentals

Variable expenses: Variable expenses are directly linked to the production process. The variable cost per unit remains constant. The total variable cost variates with the production level or activity level. These are considered as direct costs which are relevant for the decision-making process. Direct materials per unit, labor cost per unit etc. are the examples of variable expenses.

Fixed expenses: Fixed expenses are one-time expenses. Fixed expenses do not variate with the level of production activity. Fixed expenses incur even when there is no production. Fixed expenses remain constant throughout the production process, irrespective of the level of production activity. Fixed cost per unit variates with production level but total fixed cost remains constant. Depreciation, rent etc. are the examples of fixed expenses.

Opportunity Cost: Opportunity cost is the cost of next best alternative foregone, that is, the cost at which the current alternative is chosen over the next best available alternative.

Decision making: The process of selecting a course of action out of the alternative courses of action available is termed as decision making. It is a comprehensive process involving various analytical tasks and processes to arrive at the final decision.

Make or buy decision: A make or buy decision is the act of selecting the choice between making or buying a product.

1a)

Calculate the total cost under make option and buy option as follows:

1b)

Based on the relevant costs between making and buying the part, it is recommended to

2a)

Calculate the cost of making or buying the parts as follows:

Hence, the total cost of making and buying the parts, assuming that there is a segment margin from the launch of new product with used capacity is $471,000 and $465,000 respectively.

2b)

Based on the relevant costs between making and buying the part, it is recommended to

Ans: Part 1a

Total cost of Making the parts is $366,000 and Buying the parts is $465,000.