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 $32 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 aufacturing overheadallocated Total cost 17, eee Per Units Unit Per Year S 14 238. 136.00 51. 51.ee 102,00 $ 54 5570.000 "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 17000 carburetors from the outside supplier? 2. Should the outside supplier's offer be accepted 3. Suppose that the carburetors were purchased. Troy Engines. d. 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 disadvantages of buying 17000 carburetors from the outside supplier? 4. Given the new assumption in requirement should the outside supplier's offer be accepted? Complete this question by entering your answers in the tabs below.

Answer 1

1) Differential analysis

	Make	Buy
Direct material	238000
Direct labor	136000
variable manufacturing overhead	51000
Fixed manufacturing overhead (51000/3)	17000
Purchase cost (17000*32)		544000
Total relevant cost	442000	544000

Financial (disadvantage) = 442000-544000 = -102000

2) No

3) Differential analysis

	Make	Buy
Direct material	238000
Direct labor	136000
variable manufacturing overhead	51000
Fixed manufacturing overhead (51000/3)	17000
Opportunity Cost	170000
Purchase cost (17000*32)		544000
Total relevant cost	612000	544000

Financial advantage = 612000-544000 = 68000

4) Yes