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 $91.0 per unit. To evaluate this offer, Troy Engines Ltd. has gathered the following information relating to its own cost of producing the carburetor internally: PerUnit 36,000 Unitsper Year Direct materials $ 21 $ 756,000 Direct labour 24 864,000 Variable manufacturing overhead 17 612,000 Fixed manufacturing overhead, traceable 27.0 * 972,000 Fixed manufacturing overhead, allocated 23 828,000 Total cost $ 112.0 $ 4,032,000 * One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). 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 $750,000 per year. Compute the total differential cost in producing and buying the product when the segment margin is foregone on a potential new product line.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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 $91.0 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	36,000 Units per Year
Direct materials	$	21		$	756,000
Direct labour		24			864,000
Variable manufacturing overhead		17			612,000
Fixed manufacturing overhead, traceable		27.0	*		972,000
Fixed manufacturing overhead, allocated		23			828,000

Total cost	$	112.0		$	4,032,000

*	One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).

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 $750,000 per year. Compute the total differential cost in producing and buying the product when the segment margin is foregone on a potential new product line.

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