Question

Exercise 12-3 Make or Buy Decision [LO12-3] Troy Engines, Ltd., manufactures a variety of engines for use in heavy equip...

Exercise 12-3 Make or Buy Decision [LO12-3]

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 $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:

Per Unit 15,000 Units
Per Year
Direct materials $ 14 $ 210,000
Direct labor 10 150,000
Variable manufacturing overhead 3 45,000
Fixed manufacturing overhead, traceable 6 * 90,000
Fixed manufacturing overhead, allocated 9 135,000
Total cost $ 42 $ 630,000

*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 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?

0 0
Add a comment Improve this question Transcribed image text
Answer #1

1.Financing advantage of buying = Relevant cost of making – cost of buying

Only avoidable costs are relevant for producing the carburetors. Hence, Depreciation and allocated costs are not relevant

Financial Advantage of buying = (14+10+3)*15,000 + 90,000*1/3 – 15,000*35

= $(90,000)

i.e. disadvantage

2.No, since disadvantage

3.Financial Advantage = Segment Margin – Disadvantage of buying

= $150,000-90,000

= $60,000

i.e. advantage

4.Yes, since advantage

Add a comment
Know the answer?
Add Answer to:
Exercise 12-3 Make or Buy Decision [LO12-3] Troy Engines, Ltd., manufactures a variety of engines for use in heavy equip...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Exercise 12-3 Make or Buy Decision [LO12-3] Troy Engines, Ltd., manufactures a variety of engines for...

    Exercise 12-3 Make or Buy Decision [LO12-3] 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 $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the...

  • Exercise 12-3 Make or Buy Decision (LO12-3] Troy Engines, Ltd., manufactures a variety of engines for use in heavy equi...

    Exercise 12-3 Make or Buy Decision (LO12-3] 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 $33 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the...

  • Exercise 12-3 Make or Buy Decision (LO12-3] Troy Engines, Ltd., manufactures a variety of engines for...

    Exercise 12-3 Make or Buy Decision (LO12-3] 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 $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the...

  • Exercise 12-3 Make or Buy Decision (LO12-3] Troy Engines, Ltd., manufactures a variety of engines for...

    Exercise 12-3 Make or Buy Decision (LO12-3] 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 $37 per unit. To evaluate this offer. Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the...

  • Exercise 12-3 Make or Buy Decision (LO12-3] Troy Engines, Ltd., manufactures a variety of engines for...

    Exercise 12-3 Make or Buy Decision (LO12-3] 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 $32 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the...

  • Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has...

    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 $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: Per Unit 15,000 Units Per...

  • Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has...

    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 $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: 1. Assuming the company has...

  • EXERCISE 11-3 Make or Buy Decision LO11-30 Troy Engines, Ltd., manufactures a variety of engines for...

    EXERCISE 11-3 Make or Buy Decision LO11-30 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 $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the...

  • Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has...

    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: Per Unit 15,000 Units Per...

  • Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has...

    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: *One-third supervisory salaries; two-thirds depreciation...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT