Reference no: EM132762997

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 produce and sell one type of carburetor to Troy Engines Ltd. for a cost of $43 per unit. To evaluate this offer, Troy Engines Ltd. has gathered the following information relating to its own cost of producing the carburetor internally:

1. Direct materials cost $22 per unit.

2. Troy Engines pays its direct labour employees $20 per hour; each carburetor requires 30 minutes of labour time.

3. Variable manufacturing overhead is allocated at 30% of direct labour cost.

4. Total fixed manufacturing cost amounts to $15 per unit, of which 60% is allocated common cost and the remaining 40% covers depreciation of special equipment and supervisory salaries. The special equipment has no resale value. Supervisory personnel will be transferred to a different department if the company decides to purchase the carburetor from the outside supplier.

5. Yearly production of this type of carburetor is 15,800 units.

Required -

1-a. Assume that the company has no alternative use for the facilities that are now being used to produce the carburetors. Compute the total differential cost per unit for producing and buying the product.

1-b. Should the outside supplier's offer be accepted?

2-a. 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. Compute the total differential cost for producing and buying the product.

2-b. Should Troy Engines Ltd. accept the offer to buy the carburetors for $43 per unit?