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20 Nov 2017

EXERCISE 12-3 Make or Buy a Component [LO12-3] 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:

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21 Nov 2017
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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 $31 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:

*40% supervisory salaries; 60% depreciation of special equipment (no resale value).

1) a) 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.

b) Should the outside supplier's offer be accepted?

2) a) 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 $105,000 per year. Compute the total cost of making and buying the parts.

b) Should Troy Engines, Ltd., accept the offer to buy the carburetors for $31 per unit?

 

Question 8 options:

Troy Engines, Ltd. manufactures a variety of engines for use in heavy equipment. The company hasalways produced all of the necessary parts for its engines, including all of the carburetors. Anoutside supplier has offered to sell one type of carburetor to Troy Engines for a cost of $35 percarburetor. To evaluate this offer, Troy Engines has gathered the following information relatingto its own cost of producing the carburetor internally: per unit cost 15,000 units per year direct materials ........... $14 $210,000 direct labor ............... $10 $150,000 variable overhead .......... $9 $135,000 allocated fixed overhead ... $5 $ 75,000If Troy Engines purchases the carburetors from the outside supplier, the space that is being usedto produce the carburetors can be rented to a small business who will pay Troy $17,000 per yearfor the space.Calculate the decrease in company profits if Troy Engines accepts the outside suppliers offer.Do not use a minus sign, decimals, or type the word decrease after your answer.

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 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 $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

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