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).

Answer 1

3.

	Making	Buying	Difference
Direct Materials	$      340,000		$         340,000
Direct Labor	$      220,000		$         220,000
Variable Manufacturing Overhead	$         60,000		$           60,000
Fixed Overhead Traceable	$         60,000	$          60,000	$                    -
Fixed Overhead allocated	$      120,000	$       120,000	$                    -
Purchase Cost		$       700,000	$       -700,000
New Product Segment Margin	$                  -	$      -200,000	$         200,000
Total	$      800,000	$       680,000	$         120,000

There would be financial advantage of $120000, since new product is being produced it is assumed that supervisory salaries will continue to be paid. Otherwise financial advantage would have been $140000

4.
Since there is financial advantage, therefore offer should be accepted