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:Per Unit 15,000 Units per YearDirect materials $14 $210,000Direct labor 10 150,000Variable manufacturing overhead 3 45,000Fixed manufacturing overhead, traceable 6* 90,000Fixed manufacturing overhead, allocated 9 135,000Total cost $42 $630,000--------------------------------------------------------------------------------*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).Requirement 1:(a) What will be the total relevant cost of 15,000 units, if they are manufactured internally? (Omit the "$" sign in your response.)Total relevant cost $ ?Requirement 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 $150,000 per year.(a) What will be the total relevant cost of 15,000 units, if they are manufactured internally? (Omit the "$" sign in your response.)Total relevant cost $ ?

Answer 1

Answer:

(A)

The total relevant cost would be: 495,000

Buy 15,000 x 35 = 525,000

It would be better to keep producing.

(B) relevant cost 495,000

Buy 525,000 - 150,000 = 375,000

In this scenario is better to buy the procuct, as this alternative will come with the 525,000 cost but 150,000 contribution margin in the new product

Explanation:

The relevant cost would be:

Direct Materials                         14

Direct labor                                10

Variable Overhead                     3

traceable fixed overhead          6

Total                                         33

15,000 x 33 = 495,000

The depreciation is a sunk cost, already incurred when the machine was purchased. Is not relevant to decide wether to produce or buy

The potencial new product would be opportunity cost:

It should be considered as a decrease in the cost of buy the product