Reference no: EM132561985

Make or Buy a Component

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 sellone 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 producing the carburetor internally:

Per Unit 15,000 Units per Year

Direct Materials $14 $210,000

Direct Labor 10 150,000

Variable Manufacturing Overhead 3 45,000

Fixed Manufacturing Overhead, traceable 6* 90,000

Fixed Manufacturing Overhead, allocated 9 135,000

Total Cost: $42 $630,000

*One third supervisory salaries; two thirds depreciation of special equipment (no resale value)

Question 1: Assuming that the company has no alternative use for the facilities that are now being used to produce the carburetors, should the outside suppliers offer be accepted? Show all computations.

Question 2: Suppose that if the carburetors were purchased, Troy Engines Ltd. could use the freed capacity to launch a new product. The segment margin for the new product would be $150,000 per year. Should Troy Engines Ltd. accept the offer to buy the carburetors for $35 per unit? Show all computations.