Complete 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:
If they want to buy from the company in the first scenario, total cost will be: 15,000 x 35 = 525,000
So, in this case it would be preferable if they produce their carburetors internally
B) In this case,it would be better and cheaper to is better to buy the carburetors. Since it has a 525,000 cost but 150,000 contribution margin in the new product
Explanation:
A) If they keep producing internally, the total cost would be: The relevant cost would be:
Direct Materials = 14
Direct labor =10
Variable Overhead = 3
traceable fixed overhead =6
Total =33
15000 * 33 = $495,000
If they want to buy from the company in the first scenario, total cost will be: 15,000 x 35 = 525,000
So, in this case it would be preferable if they produce their carburetors internally.
B) Total production cost: 495,000
If they want to buy from the company, total cost will be: 525,000 - 150,000 = 375,000
In this case,it would be better and cheaper to is better to buy the carburetors. Since it has a 525,000 cost but 150,000 contribution margin in the new product
