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 $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. Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Pixed manufacturing overhead, allocated Total cost 17,000 Units Per Per Unit Year 917 $ 289,000 B 136,000 4 68,000 6. 102,000 9 153,000 $ 44 $ 748,000 "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 17,000 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 $170,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 17,000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted?

Answer 1

1.

fixed cost allocated are fixed and constant in both the alternative so they are irrelevant

	Make	buy
cost of purchasing		35$
direct material	$17
labor	$8
variable overhead	$4
fixed manufacturing overhead traceable	$2[6/3]
common fixed overhead	0	0
total costs	31	35

only supervisor salary is avoidable so it is relevant

depreciation is sunk non cash cost so it is not relevant.

financial disadvantage = [35-31]*17000units = 68000$

2. no it should not accept the offer as the cost of making good is lesser than buying

3. 170000is opportunity cost of making product

	making	buying
cost of making	527000[31*17000]	595000[35*17000]
opportunity cost -new product line	170000
total cost	697000	595000

4. yes it should accept the offer.as the cost of buying is 595000$ lesser than cost of making.