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

Question

Troy Engines, Ltd, manufactures a varlety 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 $39 per unit To evaluate this offer, Troy Engines, Ltd, has gathered the following information relating to its own cost of producing the carburetor internally Pez Unit Tear Direct materials Direct laber Variable nanufactaring overhead 18 $378,000 11 231,000 33,000 63,000 126 000 541 861,C00 FLxed manufacturing overbead, located Total cost eeind supervisory salaries, two-thirds depreciation of special equipment (no resale vale t. Assuming the company has no alternative use for the facilities that are now being used to produce the the financial advantage (disadventage) of buying 21,000 carburetors from the outside supplier? 2. Should the outside supplier's offer be accepted? 3. Suppos segment (disadventage) of buying 21000 carburetors from the outside supplier? 4. Given the new assumption In requirement 3, should the outside supplier's offer be accepted? e that if the carburetors were purchased, Troy Engines, Ltd, could use the freed capacity to launch a new product The margin of the new product would be $210,000 per year. Given this new assumption, what t would be financial advantage Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Assuming the company has no altermative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disedvantage) of buying 21,000 carburetors from the outside supplier? C Prey2 of 12 Next

Explanation / Answer

The given situation is a situation of Make or Buy decision making. In this kind of situations, we would analyse all the relevant costs and revenues inorder to decide whether to produce in-house or purchase from the external market.

In the given costs, Fixed costs whether it is allocated or traceable are not relevant.

But supervisory salary of 1/3rd of fixed costs-traceable may be avoided.

Relevant cost to produce one unit is as follows:

Direct Material                             :    $18

Direct Labor   :      $11

Variable Manufacturing Overhead:          $3

Supervisory Salary ($3 x 1/3)        :           $1

Relevant cost of one unit                       $33

1. Relevant cost of producing one unit is $33, whereas to purchase it, would cost $39 per unit.

There won't be any Financial advantage for the company in this case, if 21,000 carburetors are purchased from the outside supplier. There would be financial disadvantage of $126,000 if 21,000 carburetors are purchsaed from the outside supplier.

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2. The outside supplier's offer should not be accepted.

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3. If the freed space could be used to earn $210,000 segment margin per year, their would be opportunity cost in production of carburetors by the company.

Opportunity cost per unit of carburetor = $210,000 / 21,000 = $10 per unit.

Total Relevant cost of producing one carburetor = $33 + $10 = $43 per carburetor.

Financial advantage on accepting outside supplier's offer = 21,000 x ($43 - $39) = $84,000

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4. Based on the assumption used in 3 above, the offer should be accepted as that would entail financial advantage to the company.

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Hope this is helpful!!

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