Question

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 $30 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following Information relating to its own cost of producing the carburetor Internally: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost 12.888 Per Units Unit Per Year $ 12$ 144.888 B 96.688 2 24.088 9 108,000 12 144. $ 43 $ 516,080 -One-third supervisory salaries, two-thirds depreciation of special equipment (no resale value). Required: 1. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 12,000 carburetors from the outside supplier? 2. Should the outside supplier's offer be accepted? 3. 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 $120,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 12.000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 12,000 carburetors from the outside supplier? Required 1 Required 2 >

Answer 1

Requirement #1
	Per unit		Total 12000 units
	Make	Buy	Make	Buy
Direct materials	12		144000
Direct labor	8		96000
Variable manufacturing overhead	2		24000
Fixed manufacturing overhead traceable(9*1/3)	3		36000
Purchase cost		30		360000
Total			300,000	360,000
Difference in cost of buying and making = 360000-300000 = $60000
Financial (disadvantage) $(60000)
Requirement #2
Reject the offer
Because buying is more costlier than making.
Requirement #3	Make	Buy
Total cost	300,000	360,000
Opportunity cost	120000
Total relevant cost	420000	360000
Difference in favor of buying = 420000-360000 = $60000
Financial advantage $60000
Requirement #4
Accept the offer Because buying is cheaper than making.

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