Question

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 $36 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: Per Unit 20,000 Units Per Year Direct materials $ 13 $ 260,000 Direct labor 11 220,000 Variable manufacturing overhead 4 80,000 Fixed manufacturing overhead, traceable 6 * 120,000 Fixed manufacturing overhead, allocated 9 180,000 Total cost $ 43 $ 860,000 *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 20,000 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 $200,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 20,000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3, should the outside supplier’s offer be accepted?

Answer 1

11 Units Per Units 20000 Direct Material 13 260000 Direct labor 220000 Variable Manufacturing overheads 80000 Fixed Manufacturing Overheads, Trecable 6 120000 Fixed Manufacturing overhead , Allocated 9 180000 43 860000 Fixed Manufacturing Overheads, Trecable Supervisory salaries (Relevant Cost (6*33%) 33% Depreciation (irrelevan Cost)(6*67%) 67% Purchasing Price of the Unit 36 Solutions Relevant Cost of Making and Buying the Parts 20000 Make Buy Direct Material 13 260000 Direct labor 11 220000 Variable Manufacturing overheads 80000 Fixed Manufacturing Overheads, Trecable 40000 Fixed Manufacturing overhead , Allocated Purchasing Price 36 720000 Total Cost 600000 720000 1 Financial (Disadvantage ) -120000 Shoud the outside Suppliers offer be accepted NO

Compute the Relevant cost if the new Prodcuct will privide 200000 Direct Material Direct labor Variable Manufacturing overheads Fixed Manufacturing Overheads, Trecable Segment Margin (Opportunity Cost) Purchasing Price Total Cost 20000 Make Buy 13 260000 11 220000 80000 21 40000 200000 36 720000 800000 720000 Financial Advantage 80000 | 4 Shoud the outside Suppliers offer be accepted YES