Garett Engines Ltd. (GEL) 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 oil pumps. An outside supplier has offered to produce and sell one type of oil
pump to GEL for a cost of $37 per unit. To evaluate this offer, GEL has gathered the following information relating to its cost of
producing 15,200 oil pumps:
1. Direct materials cost $16 per unit.
2. GEL pays its direct labour employees $20 per hour, each oil pumps requires 30 minutes of labour time.
3. Variable manufacturing overhead is allocated at 30% of direct labour cost.
4. Total fixed manufacturing cost amounts to $15 per unit, of which 60% is allocated common cost and the remaining 40% covers
depreciation of special equipment and supervisory salaries. The special equipment has no resale value. Supervisory personnel will
be transferred to a different department if the company decides to purchase the oil pump from the outside supplier.
Required:
1-a. Assume that the company has no alternative use for the facilities that are now being used to produce the oil pump. Compute the
total differential cost per unit for producing and buying the product.
Total differential cost (per unit) in favour of
