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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. 1-b. Should the outside supplier's offer be accepted? Yes No 2-a. Suppose that, if the oil pump were purchased, GEL could use the freed capacity to launch a new product. The segment margin of the new product would be $150,000 per year. Compute the total differential cost for producing and buying the product. 2-b. Should GEL accept the offer to buy the oil pump for $37 per unit? Yes No

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