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 $40 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally Per Unit $ 15 11 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost 15,000 Units per Year $ 225, 000 165,000 30,000 135,000 180,000 $ 735,000 9* 12 $ 49 *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 the 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? Financial (disadvantage) Required 2 >

Answer 1

Required 1 :
	Make	Buy
Direct materials	225000
Direct labor	165000
Variable manufacturing overhead	30000
Buying cost ( 15000 * 40 )		600000
Fixed manufacturing overhead, traceable ( Supervisor's salary = 135000 * 1 / 3 )	45000
Total relevant cost	465000	600000

Note : Allocated fixed manufacturing overhead and depreciation of special equipment will appear in both the situations and will not affect the decision marking and hence the same is ignored in the calculation.

Total relevant cost of making	465000
Less : Total relevant cost of buying	600000
Financial advantage (Disadvantage)	(135000)

Required 2 :

Answer : No

Reason : As the outside supplier's offer is resulting in a financial disadvantage

Required 3 :
	Make	Buy
Direct materials	225000
Direct labor	165000
Variable manufacturing overhead	30000
Buying cost ( 15000 * 40 )		600000
Fixed manufacturing overhead, traceable ( Supervisor's salary = 135000 * 1 / 3 )	45000
Less: Segment margin of the new product		150000
Total relevant cost	465000	450000

Total relevant cost of making	465000
Less : Total relevant cost of buying	450000
Financial advantage (Disadvantage)	15000

Required 4 :

Answer : Yes

Reason : As the outside supplier's offer is resulting in a financial advantage