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				15,000 Units Per Year
Direct materials	$	15		$	225,000
Direct labor		11			165,000
Variable manufacturing overhead		2			30,000
Fixed manufacturing overhead, traceable		9	*		135,000
Fixed manufacturing overhead, allocated		12			180,000
Total cost	$	49		$	735,000

*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?

Answer 1

Requirement Solution

Financial (Disadvantage)

$    (135,000.00)

Working

Statement of Cost Analysis(15000 Units)
					Make	Buy	Inremental (cost) or benefit
Purchase Price	$                        -	$      600,000.00	$      (600,000.00)
Direct Material	$      225,000.00	$                        -	$        225,000.00
Direct labor	$      165,000.00	$                        -	$        165,000.00
Variable Manufacturing Overheads	$        30,000.00	$                        -	$          30,000.00
Fixed Manufacturing Overheads,Avoidable	$        45,000.00		$          45,000.00
Total Relevant Cost	$      465,000.00	$      600,000.00	$      (135,000.00)

It is not advisable to accept the offer.