Troy Engines. Ltd., manufactures a variety of engines for use in heavy equipment

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: 19,800 Per Units Unit Per Year Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost s16 s84,00 10 190,009 38,000 9171,000 12228,8e0 5 49 $ 931,000 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 19,000 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 $190.000 per year Given this new assumption, what would be financial advantage (disadvantage) of buying 19,000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted?

Explanation / Answer

per unit Differential cost 19,000 units make buy make Buy Cost of purchasing 34 646000 Direct materials 16 304000 direct labor 10 190000 variable manufacturing overhead 2 38000 fixed manufacturing overhead ,traceable 3 57000 fixed manufacturing overhead,common 0 0 total costs 31 34 589000 646000 Difference in favor of continuing to make the carburetors 3 57000 Make Buy 1a) total relevant cost (15,300 units) 589000 646000 1b) Reject 2a) make Buy cost of purchasing (part1) 646000 cost of making (part 1) 589000 opportunity cost- segment margin forgone 190,000 total cost 779000 646000 difference in favour of purchasing from outside supplier 133000 Make Buy total relevant cost (15,300 units) 779000 646000 2b) Accept

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