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

                                                       -----------------------------------------------

Total Relevant cost                           387,240                  525,000