question archive Ohio State University ACCTMIS 2000 Troy Engines manufactures a variety of engines for use in heavy equipment
Ohio State University ACCTMIS 2000 Troy Engines manufactures a variety of engines for use in heavy equipment
Subject:AccountingPrice:4.87 Bought7
Ohio State University ACCTMIS 2000
Troy Engines 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 for a cost of $36 per carburetor. To evaluate this offer, Troy Engines has gathered the following information relating to its own cost of producing the carburetor internally:
per unit cost 15,000 units per year
direct materials ........... $12 $180,000
direct labor ............... $8 $120,000
variable overhead .......... $7 $ 105,000
allocated fixed overhead ... $8 $120,000
If Troy Engines purchases the carburetors from the outside supplier, the space that is being used to produce the carburetors can be rented to a small business who will pay Troy $20,000 per year for the space.
Calculate the selling price charged by the outside supplier that would make Troy Engines economically indifferent between making and buying the carburetor.
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Answer : $36.33
If the outside supplier charges Troy Engines the amount of $36.33, it may induce the company to decide to outsource because the making and buying of the carburetor at that point is indifferent. By this calculation, it can be concluded that it is best for the Troy Engines to accept the offer of an outside supplier to purchase carburetors at a price of $36 per unit.
Step-by-step explanation
a. Compute the total costs of making carburetor.
Direct materials $180,000
Direct labor $120,000
Variable overhead $ 105,000
Allocated fixed overhead $120,000
Total. $525,000
b. Use the formula below to find the selling price. Let x be the selling price.
15,000x - $20,000 = $525,000
15,000x = $525,000+$20,000
15,000x = $545,000
15,000x/15,000? = 545,000?/15,000
x = $36.33
• 15,000 units are the needed units to be bought or made for a year as stated in the problem.
• $20,000 is deducted from the cost of outsourcing/buying because, as stated, the space used to produce carburetors can be rented if Troy considers to buy instead of make.
