Question

Troy Engines, Ltd., manufactures a variety of engin 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 evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor intermally; es for use in heavy equipment. The company has always produced all of the necessary parts for 15,700 Units Per UnitPer Year Direct matenals Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost $ 9141,300 172,700 31,400 141,300 204,100 9* 54690,800 40% supervisory salanes; 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 Total relevant cost (15,700 units) 1b. Should the outside supplier's offer be accepted? Reject 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 $137.880 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.) Total relevant cost (15,700 units) 2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $34 per unit? O Accept O Reject HintsReferences eBook & Resources Hint#1 Check my work

Answer 1

1a.

Calculation of variable cost of manufacturing 1 carburetor

Direct material = $9

Direct labor = $11

Variable manufacturing overheads = $2

Supervisory salaries = $3.60

Hence, variable cost of manufacturing 1 carburetor = $9 + 11 + 2+ 3.60

= $25.60

Fixed manufacturing overheads (traceble) are $9 per carburetor out of which 40% portion ($9 x 40% = $3.60) is supervisory salaries and 60% portion ($9 x 60% = $5.40) is depreciation of a special equipment. Since supervisory salaries will be incured only when the carburetor is manufactured, hence it will be considered while calculating variable cost of manufacturing of carburetors. On the other hand, fixed manufacturing overheads (allocated) and Depreciation of special plant (fixed cost), will have to be incurred whether the carburetor is manufactured or bought from the outside supplier.

Outside supplier's price= $34/ carburetor

Hence, cost of buying from outside supplier = 15,700 x 34

= $533,800

Add: Fixed manufacturing overheads = 15,700 x 18.40

= $288,880

Hence, total cost of buying from outside supplier = 533,800 + 288,880

= $822,680

Total cost of making 15,700 units = $690,800 (given)

1b

Since total cost of making 15,700 units is less than total cost of buying from outside supplier, hence units should be made and not bought from the outside supplier. Accepting outside supplier's offer will result into a financial loss of $131,880 (822,680 - 690,800), hence it must not be accepted.

Outside supplier's offer must be rejected.

2a.

If 15,700 carburetors are bought from the outside supplier, the freed capacity can be used by the company in launching a new product. The segment margin of the new product would be $137,880 per year. Financial impact of the new product can be presented as under:

Segment margin of the new product = $137,880

Loss due to purchase of carburetors from the outside supplier = $131,880

Hence, net gain to the company = $137,880- $131,880

= $6,000

2b.

Since the gain provided by manufacturing the new product is more than the loss incurred due to acceptance of outside supplier's offer, hence the outside supplier's offer must be accepted and the freed capacity should be used to manufacture the new product. It will increase the overall profits of the company by $6,000.

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