Ch 10 Graded HomewoX Troy Engines Ltd manufactures a variety

Ch 10 Graded HomewoX+ 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 $32 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally 14,100 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Per Units Unit Per Year S 9 $126,900 11 155,100 3 42,300 6 84,600 13 183,300 Total cost 42 $592,200 \"40% supervisory salaries: 60% depreciation of special equipment(no resale value) Required: 1a. Assuming that the company has no alternative use for the faclities 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 declmals.) Total relevant cost (14,100 units) 1b. Should the outside supplier\'s offer be accepted? O Reject O Accept 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 $112,060 per year Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per uni rate to 2 decimals.) Total relevant cost (14,100 units) 2b Should Troy Engines, Ltd. accept the offer to buy the carburetors for $32 per unit? O Reject O Accept

Solution

Requirement 1(a)

MAKE

BUY

Total Relevant Costs (14,100 Units)

$358,140

$451,200

Cost per unit ($)

MAKE

BUY

Purchase Cost

-

32.00

Direct materials

9.00

-

Direct labor

11.00

-

Variable manufacturing overhead

3.00

-

Fixed manufacturing overhead, traceable **

2.40

-

Fixed manufacturing overhead, common

-

-

Total costs

25.40

32.00

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

Total Relevant Costs (MAKE) = 14,100 x $25.40 = $358,140

Total Relevant Costs (BUY) = 14,100 x $32.00 = $451,200

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

$358,140

-

Cost of buying

-

$451,200

New product line segment margin

$112,060

-

Total Relevant Costs

$470,200

$451,200

Requirement 2(b) -

ACCEPT. Since the total relevant cost is less in the case of BUYING OPTION

	MAKE	BUY
Total Relevant Costs (14,100 Units)	$358,140	$451,200