Question

Check my work Exercise 12-3 Make or Buy Decision (LO12-3) 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 $32 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally 17,000 Bock $165 238.000 References 51.900 Variable manafacturing overhead Fixed manufacturing overhead, traceable Yixed manufacturing overhead allocated Total cos $34578.000 "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 17,000 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 $170.000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 17,000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted?

Answer 1

1. Statement showing Advantages or disadvantages of accepting Outsider offer

Cost per unit of manufacture

Direct material	14
Direct labor	8
Variable manufacturing OH	3
Fixed manufacturing OH traceable	1
Fixed manufacturing oh allocated	6
Total Manufacturing cost	34
Cost p u buying from outsider	32
Disadvantages from buying	(2)
Total Disadvantages on buying from outsider(17000*2)	(34000)

Note 1: 2/3 of traceable fixed oh i.e. dep on special equipment will form part of decision

making.

Note 2: Fixed allocated manufacturing oh also form part of decision making because it will still be incurred and can not be recovered from other use.

2

Outsider offer of buying unit should not be accepted because there is no benefit of accepting the offer because disadvantages.

Since there is no alternative use of spare capacity and cost already to be incurred for allocation will not be recovered from other alternative so it will form part of cost

3. Statement showing benefit of accepting outsider offer

Direct material	14
Direct labor	8
Variable manufacturing OH	3
Fixed manufacturing OH traceable	3
Fixed manufacturing oh allocated	6
Total Manufacturing cost	34
Cost p u buying from outsider	32
Loss from buying	(2)
Total Loss on buying from outsider(17000*2)	(34000)
Benefit from spare capacity	170000
Total benefit on accepting offer from outside supply	136000

4 So offer from outside supplier for supply of input should be accepted as there is advantages of $ 136000