Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment
ID: 2399602 • Letter: T
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 $34 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
21,000 Units
Per Year
Direct materials
$
14
$
294,000
Direct labor
12
252,000
Variable manufacturing overhead
2
42,000
Fixed manufacturing overhead, traceable
9
*
189,000
Fixed manufacturing overhead, allocated
12
252,000
Total cost
$
49
$
1,029,000
*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 21,000 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 $210,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 21,000 carburetors from the outside supplier?
4. Given the new assumption in requirement 3, should the outside supplier’s offer be accepted?
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 21,000 carburetors from the outside supplier?
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 $210,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 21,000 carburetors from the outside supplier?
requirement_content
requr_content_cntr
requirement_cntr
Per Unit
21,000 Units
Per Year
Direct materials
$
14
$
294,000
Direct labor
12
252,000
Variable manufacturing overhead
2
42,000
Fixed manufacturing overhead, traceable
9
*
189,000
Fixed manufacturing overhead, allocated
12
252,000
Total cost
$
49
$
1,029,000
Explanation / Answer
1) Differential analysis :
Financial disadvantage = 651000-714000 = -63000
2) No, Outside supplier's offer should not accepted
3) Differential analysis :
Financial advantage = 861000-714000 = 147000
4) yes, Outside supplier's offer should accepted
Make Buy Direct material 294000 Direct labour 252000 Variable manufacturing overhead 42000 Fixed manufacturing overhead (189000/3) 63000 Purchase cost (21000*34) 714000 Total relevant cost 651000 714000Related Questions
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