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 17.00 Per Units Unit Per Year $ 17 5 289,000 8 136.000 4 68.00 102.00 9 153. $45 748.ee *One third supervisory salaries; two-thirds depreciation of special equipment (no resale value).

Answer 1

1.Financing advantage of buying = Relevant cost of making – cost of buying

Only avoidable costs are relevant for producing the carburetors. Hence, Depreciation and allocated costs are not relevant

Financial Advantage of buying = (17+8+4)*17,000 + 102,000*1/3 – 17,000*35

= $(68,000)

i.e. disadvantage

2.No, since disadvantage

3.Financial Advantage = Segment Margin – Disadvantage of buying

= $170,000-68,000

= $102,000

i.e. advantage

4.Yes, since advantage