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 Per Unit $ 17 1e Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost 20,000 Units Per Year $ 340, eee 2ee, eee 40, eee 180,000 240.000 $1,000,000 g* 12 $50 "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? 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 20,000 carburetors from the outside supplier? Financial (disadvantage)

Answer 1

Required 1 :

	Make	Buy
Direct materials	340000
Direct labor	200000
Variable manufacturing overhead	40000
Buying cost ( 20000 * 36 )		720000
Fixed manufacturing overhead, traceable ( Supervisor's salary = 180000 * 1 / 3 )	60000
Total relevant cost	640000	720000

Note : Allocated fixed manufacturing overhead and depreciation of special equipment will appear in both the situations and will not affect the decision marking and hence the same is ignored in the calculation.

Total relevant cost of making	640000
Less : Total relevant cost of buying	720000
Financial advantage (Disadvantage)	(80000)

Required 2 :

Answer : Reject

Reason : As the outside supplier's offer is resulting in a financial disadvantage

Required 3 :
	Make	Buy
Direct materials	340000
Direct labor	200000
Variable manufacturing overhead	40000
Buying cost ( 20000 * 36 )		720000
Fixed manufacturing overhead, traceable ( Supervisor's salary = 180000 * 1 / 3 )	60000
Less: Segment margin of the new product		200000
Total relevant cost	640000	520000

Total relevant cost of making	640000
Less : Total relevant cost of buying	520000
Financial advantage (Disadvantage)	120000

Required 4 :

Answer : Accepted

Reason : As the outside supplier's offer is resulting in a financial advantage