E4–6 Time allowed: 20 minutes 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 carburettors. An outside supplier has offered to produce and sell one type of carburettor to Troy Engines for a cost of £35 per unit. To evaluate this offer, Troy Engines has gathered the following information relating to its own cost of producing the carburettor internally:

Required 1 Assuming that the company has no alternative use for the facilities that are now being used to produce the carburettors, should the outside supplier’s offer be accepted? Show all computations.
2 Suppose that, if the carburettors were purchased, Troy Engines, 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 carburettors for £35 per unit? Show all computations.

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Per unit 15,000 units per year Direct materials 14 210,000 Direct labour 10 150,000 Variable manufacturing overhead 3 45,000 Fixed manufacturing overhead, traceable 6" 90,000 Fixed manufacturing overhead, allocated 135,000 Total cost 42 630,000 "One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).