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 Year
Direct materials $ 14 $2,10,000
Direct labor 10 1,50,000
Variable manufacturing overhead 3 45,000
Fixed manufacturing overhead, traceable 6 90,000
Fixed manufacturing overhead, allocated 9 1,35,000
Total cost $42 $6,30,000
One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).
Required:
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.
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.