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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:
Required:
Problem 1: 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.
Problem 2: Should the outside supplier's offer be accepted?
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