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 $36 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 15,100 Units
Per Year Direct materials $ 9 $ 135,900 Direct labor 11 166,100 Variable manufacturing overhead 4 60,400 Fixed manufacturing overhead, traceable 9* 135,900 Fixed manufacturing overhead, allocated 13 196,300 Total cost $ 46 $ 694,600
*40% supervisory salaries; 60% depreciation of special equipment (no resale value).
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.
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 $139,840 per year. Compute the total cost of making and buying the parts.
| 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 $36 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 | 15,100 Units Per Year | |||
| Direct materials | $ | 9 | $ | 135,900 |
| Direct labor | 11 | 166,100 | ||
| Variable manufacturing overhead | 4 | 60,400 | ||
| Fixed manufacturing overhead, traceable | 9* | 135,900 | ||
| Fixed manufacturing overhead, allocated | 13 | 196,300 | ||
| Total cost | $ | 46 | $ | 694,600 |
| *40% supervisory salaries; 60% depreciation of special equipment (no resale value).
|
Related questions
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 $35 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 | 15,000 Units Per Year | ||||||
| Direct materials | $ | 14 | $ | 210,000 | |||
| Direct labor | 10 | 150,000 | |||||
| Variable manufacturing overhead | 3 | 45,000 | |||||
| Fixed manufacturing overhead, traceable | 6 | * | 90,000 | ||||
| Fixed manufacturing overhead, allocated | 9 | 135,000 | |||||
| Total cost | $ | 42 | $ | 630,000 | |||
*One-third supervisory salaries; two-thirds 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.
1b. Should the outside supplierâs 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 $150,000 per year. Compute the total cost of making and buying the parts.
2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $35 per unit?
| Accept | |
| Reject |
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 $34 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 | 21,000 Units Per Year | |||||
| Direct materials | $ | 14 | $ | 294,000 | ||
| Direct labor | 12 | 252,000 | ||||
| Variable manufacturing overhead | 2 | 42,000 | ||||
| Fixed manufacturing overhead, traceable | 9 | * | 189,000 | |||
| Fixed manufacturing overhead, allocated | 12 | 252,000 | ||||
| Total cost | $ | 49 | $ | 1,029,000 | ||
*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).
1. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 21,000 carburetors from the outside supplier?
2. 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 $210,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 21,000 carburetors from the outside supplier?
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