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 $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: Per Unit 14,200 Units Per Year Direct materials $ 9 $ 127,800 Direct labor 11 156,200 Variable manufacturing overhead 1 14,200 Fixed manufacturing overhead, traceable 9* 127,800 Fixed manufacturing overhead, allocated 13 184,600 Total cost $ 43 $ 610,600 *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.) 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 $131,280 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.) 2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $33 per unit? Reject Accept

Answer 1

1a) Differential analysis

	Make	Buy
Direct material	127800
Direct labor	156200
Variable manufacturing overhead	14200
Fixed manufacturing overhead (127800*40%)	51120
Purchase cost (14200*33)		468600
Total relevant cost	349320	468600

1b) Reject, special offer

2a) Differential analysis

	Make	Buy
Direct material	127800
Direct labor	156200
Variable manufacturing overhead	14200
Fixed manufacturing overhead (127800*40%)	51120
Opportunity Cost	131280
Purchase cost (14200*33)		468600
Total relevant cost	480600	468600

2b) Accept special offer