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 $107.0 per unit. To evaluate this offer, Troy Engines Ltd. has gathered the following information relating to its own cost of producing the carburetor internally: $ Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Per 42,000 Units Unit per Year 23 $ 966,000 28 1,176,000 21 882,000 33.0* 1,386,000 27 1,134,000 Total cost $132.0 $5,544,000 * 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.) Make Buy Total differential cost (per unit) [

Answer 1

Solution 1a:

Differential Analysis- Troy Engines Ltd - Making Carbureator (alt 1) or Buying Carbureator (Alt2)
Particulars	Making Carbureator (Alt 1)	Buying Carbureator (Alt 2)	Financial advantage (Disadvantage) of buying (Alternative 2)
Costs:
Purchase Price	$0.00	$107.00	-$107.00
Direct material	$23.00	$0.00	$23.00
Direct Labor	$28.00	$0.00	$28.00
Variable overhead	$21.00	$0.00	$21.00
Avoidable Fixed Overhead ($1,386,000*1/3 / 42000)	$11.00	$0.00	$11.00
Cost per unit	$83.00	$107.00	-$24.00

Solution 1b:

As there is net financial disadvantage, therefore outside supplier offer should not be accepted.

Solution 2a:

Differential Analysis- Troy Engines Ltd - Making Carbureator (alt 1) or Buying Carbureator (Alt2)
Particulars	Making Carbureator (Alt 1)	Buying Carbureator (Alt 2)	Financial advantage (Disadvantage) of buying (Alternative 2)
Costs:
Purchase Price (42000*$107)	$0.00	$4,494,000.00	-$4,494,000.00
Direct material	$966,000.00	$0.00	$966,000.00
Direct Labor	$1,176,000.00	$0.00	$1,176,000.00
Variable overhead	$882,000.00	$0.00	$882,000.00
Avoidable Fixed Overhead ($1,386,000*1/3)	$462,000.00	$0.00	$462,000.00
Loss of opportunity of new product margin	$1,030,000.00	$0.00	$1,030,000.00
Total Cost	$4,516,000.00	$4,494,000.00	$22,000.00

Solution 2b:

As there is net financial advantage, therefore outside supplier offer should be accepted.