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 $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: 15,000 Units Per Unit Year Per Direct materials Direct labor Variable nanufacturing overhead Fixed manufacturing overhead, traceable Pixed manufacturing overhead, allocated Total cost s 12 180,000 12 180,000 60,000 6 90,000 9 135,000 $43 $645,000 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 15,000 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 $150,000 per year. Given this new assumption, what would be the financial advantage disadvantage) of buying 15,000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted? 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 15,000 carburetors from the outside supplier? Required 1 Required 2Required 3Required 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 $150,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 15,000 carburetors from the outside supplier?

Answer 1

(1)

	Make	Buy
Direct Material	($12 * 15000) =$180000	-
Direct Labour	($12 * 15000) =$180000	-
Variable Mfr O/H	($4 * 15000) =$60000	-
Fixed Mfr O/H, Traceable (one third cost is avoidable)	($2 * 15000) =$30000	-
Purchase Price from outside supplier ($36 * 15000)	-	$540000
Total Cost	$450000	$540000

Financial disadvantage of buying 15000carburators from outside supplier = $450000 - $540000 = ($90000)

(2) The company should make the carburetors. The outside supplier’s offer should not be accepted due to financial disadvantage of $90000

(3)

	Make	Buy
Direct Material	($12 * 15000) =$180000	-
Direct Labour	($12 * 15000) =$180000	-
Variable Mfr O/H	($4 * 15000) =$60000	-
Fixed Mfr O/H, Traceable (one third cost is avoidable)	($2 * 15000) =$30000	-
Purchase Price from outside supplier ($36 * 15000)	-	$540000
Opportunity cost - new product line segment margin	$150000
Total Cost	$600000	$540000

Financial advantage of buying 15000carburators from outside supplier = $600000 - $540000= $60000

(4) Yes, Troy Engines Ltd., should accept to buy the carburetors due to financial advantage of $60000