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 15,000 Units Per Per Unit Year $ 12 $ 180,000 12 180,000 4 60,000 6* 90,000 135,000 $ 43 $ 645,000 *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 15,000 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 $150,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 15,000 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 15,000 carburetors from the outside supplier?

Answer 1

1) Differential analysis

	Make	Buy
Direct material	180000
Direct labor	180000
Variable overhead	60000
Fixed overhead (90000/3)	30000
Purchase cost (15000*36)		540000
Total	450000	540000

Financial (disadvantage) = 450000-540000 = -90000

2) No

3) Differential analysis

	Make	Buy
Direct material	180000
Direct labor	180000
Variable overhead	60000
Fixed overhead (90000/3)	30000
Opportunity Cost	150000
Purchase cost (15000*36)		540000
Total	600000	540000

Financial advantage = 600000-540000 = 60000

4) Yes