Question

Engines, Ltd., for a cost of $35 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 17,000 Units Per Per Unit Year $ 17 $ 289,000 8 136,000 4 68,000 6* 102,000 9 153,000 $ 44 $ 748,000 *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 17,000 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 $170,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 17,000 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 $170,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 17,000 carburetors from the outside supplier? Financial (disadvantage)

Answer 1

1
	Per unit		Total 17000 units
	Make	Buy	Make	Buy
Direct materials	17		289000
Direct labor	8		136000
Variable manufacturing overhead	4		68000
Fixed manufacturing overhead traceable	2		34000
Purchase cost		35		595000
Total			527000	595000
Difference in favor of making = 527000-595000 = $68000
Financial (disadvantage) (68000)
2
NO, Reject the offer
3
	Make	Buy
Total cost	527000	595000
Opportunity cost	170000
Total relevant cost	697000	595000
Difference in favor of buying = 697000-595000 = $102000
Financial advantage 102000
4
Yes, Accept the offer