Question

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 carburetor internally: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost 17,000 Per Units Unit Per Year $ 14 $ 238,000 8 136,000 3 51,000 3* 51,000 6 102,000 $ 34 $ 578,000 *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?

Answer 1

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Ans: * Requirement-li $ 102000 (disadvantage)] допking- plote agos Total buying cost of caseboretores (17000 x $32): $ 544000 b+_ Calculation of_own_cost_of_producing the carburetora 17600 Voits per unit per year Direct materials i $14 $ 238,000 Direct Labor : 8 136000 Variable manufacturing overhead: 3 51000 Fixed manufacturing overhead traceable (Note-1) 1 17000 $ 26 $ 442000 financial advantage/ disadvantage) = 2-6 on $544000 - $ 442000 = $ 102000 (disadvantag)

Note-t traceable fixed manufacturing overhead Showld be considered in_make_on_buy_decésson, however depreciation of special equipment which have no a Resale Yalue is irrelevant for more on buy decés jon_ hesale * Requirement:2: 1. Do, the outside supplier's offer should not be accepted, because there would be a financial disadvantages of $ 102000, by accepting the offer: * Requirement-3! $68.000] advantage Working Note: * Segment margin of new product & disadvantage to buy the product i $ 170.000 :($ 102000) : $ 68000 Ner advantage

* Requirement : Yes, the outside offer should be accepted. there is a financial advantage of because of that $ 68000,

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