Reference no: EM132587301
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 $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 year
Direct Material $ 14 $ 210,000
Direct Labour 10 150,000
Variable Manufacturing Overhead 3 45,000
Fixed Manufacturing Overhead, traceable 6 (1) 90,000
Fixed Manufacturing Overhead, allocated 9 135,000
Total Cost $42 $ 630,000
(1) The part can be made inside the company for $6 less per unit
Required:
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 supplier's 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 of 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.
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