Question

Exercise 11-3 Make or Buy Decision (LO11-3) 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 12,000 Per Units Unit per Year $ 12 $144,000 96,000 24,000 9* 108,000 12 144,000 $ 43 $ 516,000 *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 12,000 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 $120,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 12,000 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 12,000 carburetors from the outside supplier? < Required 1 Required 2 >

Answer 1

(1) Relevant cost of making = DM + DL + Variable mfr OH + Supervisor salary

= $12 + $8 + $2 + $3 = $25

Relevant cost of 12000 carburetors = $25 * 12000 = $300000

Cost of buying = $30

Cost of 12000 carburetors = $30 * 12000 = $360000

Financial (disadvantage) = $300000 - $3600000 = ($60000)

(2) No, outside suppliers offer should not be accepted.

(3) Segment margin of new product = $120000

Financial advantage = $120000 + ($60000) = $60000

(4) yes, outside suppliers offer should not be accepted.