Troy Engines Ltd manufactures a variety of engines for use i

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 $33 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 labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated 15,400 Per Units Unit Per Year 9 $138,600 11 169,400 4 61,600 6 92,400 13 200,200 Total cost $ 43 $662,200 *40% supervisory salaries; 60% depreciation of special equipment (no resale value). Required: la. 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 (15.400 units) 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 $113,640 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 (15.400 units)

Solution

Requirement 1(a)

MAKE

BUY

Total Relevant Costs ( 15,400 Units)

$ 406,560

$ 508,200

Cost per unit ($)

MAKE

BUY

Purchase Cost

-

33.00

Direct materials

9.00

-

Direct labor

11.00

-

Variable manufacturing overhead

4.00

-

Fixed manufacturing overhead, traceable **

2.40

-

Fixed manufacturing overhead, common

-

-

Total costs

26.40

33.00

** Fixed manufacturing overhead, traceable = $6.00 x 40% = $2.40

Total Relevant Costs (MAKE ) = 15,400 x $26.40 = $ 406,560

Total Relevant Costs (BUY ) = 15,400 x $33.00 = $ 508,200

Requirement 1(b) - Should the outside supplier\'s offer be accepted?

REJECT. Outside supplier\'s offer should not be accepted since the Total Relevant Cost is more in case of BUYING OPTION

Requirement 2(a)

MAKE

BUY

Cost of making

406,560

-

Cost of buying

-

$ 672,100

New product line segment margin

113,640

-

Total Relevant Costs

$520,200

$ 508,200

Requirement 2(b) - ACCEPT. Since the total relevant cost is less in the case of BUYING OPTION

	MAKE	BUY
Total Relevant Costs ( 15,400 Units)	$ 406,560	$ 508,200