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 $34 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 $ 9 11 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost 15.500 Units Per Year $ 139,500 170,500 31.000 139,500 201.500 $ 682.000 9* 13 $ 44 *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.) Make Buy Total relevant cost (15,500 units) 1b. Should the outside supplier's offer be accepted? О 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 $147,200 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.) Make Buy Total relevant cost (15,500 units) 2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $34 per unit? Reject O Accept

Answer 1

1a.

	Make	Buy
Direct material	$139,500	$0
Direct labor	170,500	0
Variable manufacturing overhead	31,000	0
Traceable fixed manufacturing overhead	55,800 (139,500*40%)	0
Purchase price		527,000 (15,500*$34)
Total relevant cost (15,500 units)	$396,800	$527,000

1b.

The outsider supplier's offer should be rejected.

2a.

	Make	Buy
Direct material	$139,500	$0
Direct labor	170,500	0
Variable manufacturing overhead	31,000	0
Traceable fixed manufacturing overhead	55,800 (139,500*40%)	0
Purchase price		527,000 (15,500*$34)
Foregone oppertunity cost	147,200
Total relevant cost (15,500 units)	$544,000	$527,000

2b. As per the above results, Troy Engines Ltd. should accept the offer.