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 $33 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				18,000 Units per Year
Direct materials	$	15		$	270,000
Direct labor		9			162,000
Variable manufacturing overhead		4			72,000
Fixed manufacturing overhead, traceable		6	*		108,000
Fixed manufacturing overhead, allocated		9			162,000
Total cost	$	43		$	774,000

*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 18,000 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 $180,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 18,000 carburetors from the outside supplier?

4. Given the new assumption in requirement 3, should the outside supplier’s offer be accepted?

Answer 1

33 Units Per Units 18000 Direct Material 15 270000 Direct labor 9 162000 Variable Manufacturing overheads 472000 Fixed Manufacturing Overheads, Trecable 6 108000 Fixed Manufacturing overhead , Allocated 162000 43 774000 Fixed Manufacturing Overheads, Trecable Supervisory salaries (Relevant Cost) 33% Depreciation (irrelevan Cost) 67% Purchasing Price of the Unit Solutions 1) Relevant Cost of Making and Buying the Parts 18000 Make Buy Direct Material 15 270000 Direct labor 9 162000 Variable Manufacturing overheads 72000 Fixed Manufacturing Overheads, Trecable 236000 Fixed Manufacturing overhead , Allocated Purchasing Price 594000 Total Cost 540000 594000 Financial Disadvantage 54000 Shoud the outside Suppliers offer be accepted

Compute the Relevant cost if the new Prodcuct will 180000 privide 18000 Make Buy Direct Material 15 270000 Direct labor 9 162000 Variable Manufacturing overheads 472000 Fixed Manufacturing Overheads, Trecable 2 36000 Segment Margin (Opportunity Cost) 180000 Purchasing Price 594000 Total Cost 720000 594000 Financial Advantage 126000 Shoud the outside Suppliers offer be accepted YES