Question

Exercise 12-3 Make or Buy Decision (L012-3] 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 $30 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 13,000 Per Units Unit Per Year $ 13 $ 169,000 9 117,000 3 39,000 3* 39,000 6 78,000 $ 34 $ 442,000 *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 13,000 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 $130,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 13,000 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 13,000 carburetors from the outside supplier?

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Answer 1

1		Per Unit Differential Costs
		Make	Buy
	Cost of Purchasing		30.00			Cost of Purchasing*:	PU
	Cost of Making:					Outside Supplier	45.00
	Direct Material	13.00				Less: Opportunity Cost	25.72
	Direct Labor	9.00				(591600/23000)
	Variable OH	3.00				Net Cost of Purchasing	19.28
	Fixed OH (18*1/3)	3.00
	Total Cost	28.00	30.00
		PU
	Loss on Buying Over Manufacturing	-                    2.00
		Total
	Disadvantage on Buying Over Manufacturing	-         26,000.00	(2*13000)
2	No Since there is Loss in Buying
3		Per Unit Differential Costs
		Make	Buy
	Cost of Purchasing*		20.00			Cost of Purchasing*:	PU
	Cost of Making:					Outside Supplier	30.00
	Direct Material	13.00				Less: Opportunity Cost	10.00
	Direct Labor	9.00				(130000/13000)
	Variable OH	3.00				Net Cost of Purchasing	20.00
	Fixed OH (18*1/3)	3.00
	Total Cost	28.00	20.00
		PU
	Benfit on Buying Over Manufacturing	8.00
		Total
	Advantage on Buying Over Manufacturing	104,000.00	(8*13000)
4	Yes, Since it is giving benefit