Exercise 10-3 Make or Buy a Component [LO10-3]

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 $23 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:

? eztomhe ducation. ioe a Face Troy Engines, Ltd, manulactures a variely of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, induding all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd, for a cost of $23 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 $ 5 $ 78,500 7 109,900 3 47,100 Fixed manufacturing overhead, traceable9 141.300 9 141,300 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, allocated Total cost $ 33 $518,100 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.) Make Buy Total relevant cost (15,700 units) 1b. Should the outside supplier's offer be accepted? O Reject O 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 $88,080 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.) Make Buy Total relevant cost (15,700 units) 2b Should Troy Engines, Ltd, accept the offer to buy the carburetors for $23 per unit? Accept Reject