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 $35 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 20,000 Units Per Per Unit Year $ 17 $ 340,000 11 220,000 3 60,000 3* 60,000 6 120,000 $ 40 $ 800,000 *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 20,000 carburetors from the outside supplier?

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

Answer 38 The correct answer is Financial Disadvantage of $60000 40 Calculation 41 Financial Advantage/(disadvantage) of Buying Carburetator 42 = Relevante cost of manufacturing 20000 units - cost of purchase 43 = ((17+11+3+(3*1/3))*20000) - (35*20000) 44 = 640000 - 700000 45 = - $60000 46 = $ 60000 Disadvantage 48 Thus the correct answer is 50 Financial Disadvantage of $ 60000