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 $34 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 19,000 Units Per Per Unit Year $ 16 $ 304,000 10 190,000 2 38,000 9* 171,000 12 228,000 $ 49 $ 931,000 *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 19,000 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 $190,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 19,000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted?
Only need requirements 1 and 3 answered! Thanks!

Answer 1

The answer has been presented in the supporting shèet. All the parts has been solved with detailed explanation and calculation. For detailed answer refer to the supporting shèet.

2 3 4 5 5 7 3 Answer Part 1) Financial advantage/ (disadvantage) of Buying 19000 Carburetors from the outside supplier = Relevant cost of making the product - Purchase cost = ((direct material + direct labour + variable manufacturing overheads+relevant fixed cost)* number of units)-(number of units * purhcase cost) = ((16+10+2+(9*1/3)) *19000) - (19000*34) = ( 31*19000) - (19000*34) = ($ 57000) o Thus the correct answer financial (disadvantage) = ($57000) 2 Part 3) 3 Financial advantage/ disadvantage) of Buying 19000 Carburetors from the outside supplier 4 = Relevant cost of making the product - Purchase cost + Additional segment margin on new product 5 = ((direct material + direct labour + variable manufacturing overheads+relevant fixed cost)* number of units)-(number of units * purhcase cost ) + 190000 6 = ((16+10+2+(9*1/3)) *19000) - (19000*34) +190000 7 = ( 31*19000) - (19000*34) + 190000 8 = $ 133000 Co Thus the correct answer financial advantage of $ 133000