Make or Buy 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: 15,000 Per Units Unit per Year Direct materials $14 $210,000 Direct labor 10 150,000 Variable manufacturing overhead 3 45,000 Rxed manufacturing overhead, traceable 90,000 Axed manufacturing overhead, allocated 9 135,000 Total cost... $42 $630,000 "One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). 6 Required: 1. Assuming that the company has no alternative use for the facilities that are now being used to produ 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. Special Order Pricing Delta Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 60,000 units per year is: Direct materials.... Direct labor.... Variable manufacturing overhead. Fixed manufacturing overhead. Variable selling and administrative expense. Fixed selling and administrative expense $5.10 $3.80 $1.00 $4.20 $1.50 $2.40 The normal selling price is $21 per unit. The company's capacity is 75,000 units per year. An order has been received from a mail-order house for 15,000 units at a special price of $14.00 per unit. This order would not affect regular sales. Required: 1. If the order is accepted, by how much will annual profits be increased or decreased? (The order will not change the company's total fixed costs.) 2. Assume the company has 1,000 units of this product left over from last year that are inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price for these units? Explain. Dropping a Segment Thalassines kataskeves, S.A., of Greece makes marine equipment. The company has been experiencing losses on its bilge pump product line for several years. The most recent quarterly contribution format income statement for the bilge pump product line follows: Discontinuing the bilge pump product line would not affect sales of other product lines and would have no effect on the company's total general factory overhead or total Purchasing Department expenses. $850,000 $330,000 42.000 18,000 Thalassines kataskeves, SA Income Statement-Bilge Pump For the Quarter Ended March 31 Sales.. Variable expenses: Variable manufacturing expenses Sales commissions... Shipping..., Total variable expenses. Contribution margin.. Rxed expenses: Advertising Depreciation of equipment (no resale value) General factory overhead.. Salary of product-line manager Insurance on inventories.. Purchasing department.. Total fed expenses. Net operating loss. 390,000 460,000 270,000 80,000 105.000 32.000 8,000 45,000 540.000 $ (80,000) *Common costs allocated on the basis of machine-hours. Common costs allocated on the basis of sales dollars. Required: Would you recommend that the bilge pump product line be discontinued? Support your answer with appropriate computations
