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 $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 Per Units Unit Per Year $ 13 $ 169,000 9 117,000 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 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? REN Required 2 >

Answer 1

1.

Financial advantage ( disadvantage)

$ (52,000)

	Make	Buy	Financial Advantage ( Disadvantage
Direct materials	$ 169,000	-	$ 169,000
Direct labor	117,000	-	117,000
Variable MOH	39,000	-	39,000
Traceable Fixed Costs	13,000	-	13,000
Purchase cost	-	$390,000	(390,000)
Total Costs	$ 338,000	$ 390,000	$ (52,000)

2. No.

3.

Financial advantage ( disadvantage)

$ 78,000

	Make	Buy	Financial Advantage ( Disadvantage)
Direct materials	$ 169,000	-	$ 169,000
Direct labor	117,000	-	117,000
Variable MOH	39,000	-	39,000
Traceable Fixed Costs	13,000	-	13,000
Opportunity cost	130,000	-	130,000
Purchase cost	-	$390,000	$(390,0000
Totals	$468,000	$390,000	$ 78,000

4. Yes.

Note: Depreciation expense is allocation of a sunk cost, and therefore is not relevant for decision making. Allocated fixed manufacturing overhead would be incurred regardless of the decision to make or to buy the carburettors. Hence, it too is not relevant.