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 $34 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 19,000 Per Units Unit per Year $ 16 $ 304,000 10 190,000 2 38,000 9 171,000 12 228,000 $ 49 $ 931,000 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 19,000 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 $190,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 19.000 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 19,000 carburetors from the outside supplier? Required Required 2 >

Answer 1

1

Financial Disadvantage - $57000 (Ans)

Particulars	Make ($)	Buy ($)
Cost of purchasing carburetor from outsider (19000 units x $34)		646000
Direct material	304000
Direct labor	190000
Variable manufacturing overhead	38000
Fixed manufacturing overhead. traceable ($171000 X 1/3) supervisor salary will be considered as it is avoidable but not depreciation as it will be incurred even after purchasing	57000
Total cost	589000	646000

Financial loss (disadvantage) of purchasing carburetor = ($646000 - $589000) = $57000 (Ans)

2

No, Outside supplier's offer should not be accepted and should be rejected as it puts Troy Engines ltd at a financial disadvantage

3

Financial advantage = $133000 (Ans)

Particulars	Make ($)	Buy ($)
Total cost of purchase		646000
Total cost of manufacturing	589000
Oppurtunity cost of new product	190000
Total cost	779000	646000

Financial gain (advantage) of purchasing carburetor = ($779000 - $646000) = $133000 (Ans)

4

YES, given the new assumption, outside supplier's offer should be accepted as it put Troy Engines ltd at a financial advantage

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