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 $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: ASSUMING THAT THE COMPANY HAS NO ALTERNATIVE USE FOR THE FACILITIES THAT ARE BEING USED TO PRODUCE NOW THE CARBURETOR

Answer 1

Given Information:

Per Unit 15,000 Units Per Year Direct materials $ 9 $135,000

Direct labor 11 165,000

Variable manufacturing overhead 2 30,000

Fixed manufacturing overhead, traceable 6* 90,000

Fixed manufacturing overhead, allocated 13 195,000

Total cost $41 $615,000

Solution:

Compute the total cost of making and buying the parts:

Make Buy

Cost of purchasing 0 525,000

(15,000*35)

Direct materials 135,000 0

Direct Labour 165000 0

Variable manufacturing overhead 30,000 0

Fixed manufacturing overhead 57240 0

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Total Relevant cost 387,240 525,000