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 $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:

		Per Unit		14,900 Units Per Year
Direct materials	$	9	$	134,100
Direct labor		11		163,900
Variable manufacturing overhead		3		44,700
Fixed manufacturing overhead, traceable		6*		89,400
Fixed manufacturing overhead, allocated		13		193,700
Total cost	$	42	$	625,800

*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?

	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 $112,340 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 $32 per unit?

	Accept
	Reject

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 (14900*$32)	$0.00	$476,800.00	-$476,800.00
Direct material	$134,100.00	$0.00	$134,100.00
Direct Labor	$163,900.00	$0.00	$163,900.00
Variable overhead	$44,700.00	$0.00	$44,700.00
Avoidable Fixed Overhead ($89,400*40%)	$35,760.00	$0.00	$35,760.00
Total Cost	$378,460.00	$476,800.00	-$98,340.00

Solution 1b:

As there is net financial disadvantage, therefore outside supplier offer should be rejected.

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 (14900*$32)	$0.00	$476,800.00	-$476,800.00
Direct material	$134,100.00	$0.00	$134,100.00
Direct Labor	$163,900.00	$0.00	$163,900.00
Variable overhead	$44,700.00	$0.00	$44,700.00
Avoidable Fixed Overhead ($89,400*40%)	$35,760.00	$0.00	$35,760.00
Loss of opportunity of new product margin	$112,340.00	$0.00	$112,340.00
Total Cost	$490,800.00	$476,800.00	$14,000.00

Solution 2b:

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