Question

11-1

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:

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 13,000 Units Per Per Unit Year $ 13 $ 169,000 9 117,000 3 39,000 3* 39,000 6 78,000 $ 34 $ 442,000 *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 13,000 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 $130,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 13,000 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 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 $130,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 13,000 carburetors from the outside supplier?

Answer 1

ANSWER-

Requirement -(1)

[Assuming No Alternative Use of Facilities]:-

Following Statement Showing Financial Impact on Decision i.e.Whether to Manufacture or But from Outside as follows:-

	Cost of Make Within Company	Buy From Outside	Working
Direct Material	$169000	-	(13000 Units x $13 Per Unit)
Direct Labour	$117000	-	=(13000 Units x $9)
Variable Mfg. Overhead	$39000	-	=(13000 Units x $3)
FIxed Mfg. overhead -Traceable/Avoidable	$13000	-	=[13000 Units x($3 x 1/3)]
Supplier Cost	-	$390000	=(13000 Units x $30 Per Unit)
Total Relavent Cost:-	$338000	$390000

Therefore:-

Financial Advantage/(Disadvantage) Of Outsider supplier Offer=($52000)-i.e.($338000 - $390000).

Note:-

i) FIxed overhead which are allocated/Unavoaidable are considered to be ir-relavent cost thus, this was not included in above calculation of relavent cost.

ii) A 2/3 of part of Fixed Mfg. overhead Traceble/ avoidble i.e. Depreciation which are Non-cash item which doesn't affect the cost.

Requirement-(2)

Here, In this Case the Outsider Offer should be Rejected, as it Result into Financial Disadvantage/Loss of $52000 from Buying it from supplier.

Requirement-(3)

[Assuming Alternative Use of Facilities]  

STATEMENT OF ANALYSIS

	Make	Buy
Direct Material	$169000	-	(13000 Units x $13 Per Unit)
Direct Labour	$117000	-	=(13000 Units x $9)
Variable Mfg. Overhead	$39000	-	=(13000 Units x $3)
Fixed Mfg. Overhead-Traceble/Avoidable	$13000	-	=[13000 Units x($3 x 1/3)]
Supplier Cost	-	$390000	=(13000 Units x $30 Per Unit)
Alternative Segment Margin / Opportunity Cost Saving	-	($130000)
Total Relavent Cost:-	$338000	$260000

Therefore,

Financial Advantage of Accepting the Outsider Offer is:- $120000.i.e.($338000 - $260000).

Requirement-(4)

Thus, In this Case the Offer of Outsider is Accepted, Because it would Result into Financial Advantage of $120000 by Buying from outsider.