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 $36 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 20,000 Units Per per Unit Year $ 13 $ 260,000 11 220,000 4 80,000 6* 120,000 9 180,000 $ 43 $ 860,000 *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 20,000 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 $200,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 20,000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted?

Answer 1

1) Relevant Cost of Making and Buyinh the Parts 20000 Make Buy Direct Material 13 260000 Direct labor 11 220000 Variable Manufacturing overheads 4 80000 Fixed Manufacturing Overheads, Trecableſ 2 40000 Fixed Manufacturing overhead , Allocated Purchasing Price 720000 Total Cost 600000 720000 36 Financial Disadvantage 120000 Shoud the outside Suppliers offer be accepted NO

Compute the Relevant cost if the new Prodcuct will 200000 privide 20000 Make Buy Direct Material 260000 Direct labor 11 220000 Variable Manufacturing overheads 4 80000 Fixed Manufacturing Overheads, Trecable 2 40000 Segment Margin (Opportunity Cost) 200000 Purchasing Price 36 720000 Total Cost 800000 720000 Financial Advantage 80000 Shoud the outside Suppliers offer be accepted YES