Question

Troy Engines...

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: points 16,000 Units Per Per Unit Year $ 16 $ 256,000 12 192,000 3 48,000 3* 48,000 96,000 $ 40 $ 640,000 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost eBook Hint *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). Print References 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 16,000 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 $160,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 16,000 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 16,000 carburetors from the outside supplier? Required 1 Required 2 >

Answer 1

1) Differential analysis

	make	Buy
Direct material	256000
Direct labor	192000
variable manufacturing overhead	48000
Fixed manufacturing overhead (48000/3)	16000
Purchase cost (16000*35)		560000
Total relevant cost☻	512000	560000

Financial (disadvantage) = 512000-560000 = -48000

2) No

3) Differential analysis

	make	Buy
Direct material	256000
Direct labor	192000
variable manufacturing overhead	48000
Fixed manufacturing overhead (48000/3)	16000
Opportunity Cost	160000
Purchase cost (16000*35)		560000
Total relevant cost☻	672000	560000

Financial advantage = 672000-560000 = 112000

4) Yes