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 Fixed manufacturing overhead, allocated Total cost 16,000 Per Units Unit Per Year $ 16 $ 256,000 12 192,000 48,000 38 48,000 96,000 $ 40 $ 640,000 *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 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? Financial (disadvantage) Required 1 Required 2 >

Answer 1

1
	Per unit		Total 16000 units
	Make	Buy	Make	Buy
Direct materials	16		256000
Direct labor	12		192000
Variable manufacturing overhead	3		48000
Fixed manufacturing overhead traceable	1		16000
Purchase cost		35		560000
Total			512000	560000
Difference in favor of making = 512000-560000 = $48000
Financial (disadvantage) (48000)
2
No, Reject the offer
3
	Make	Buy
Total cost	512000	560000
Opportunity cost	160000
Total relevant cost	672000	560000
Difference in favor of buying = 672000-560000 = $112000
Financial advantage 112000
4
Yes, Accept the offer