Troy Engines, Ltd, manufactures a variety of engines for use in heavy equipment.
ID: 2410274 • 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 $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 17,000 Units Per Per Unit Year Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost $14 $ 238,00 8 136, 909 3 51,000 3 51,e00 6 102,000 $34 $578, 000 One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).Explanation / Answer
1. If company manufactures by itself, then it wil have to incur the variable cost of 425,000 other fixed cost of 153,000 is fixed in nature so it will be sunk cost for the company. And if the company buys from the supplier, then it will have to incur a total purchase cost of 17,000*32 = 544,000, so there will be a loss of 119,000.
2. No, the outsider supplier offer should not be accepted as there will be a loss of 119,000 (17,000*32-(238,000+136,000+51,000)). The fixed cost is not considered for the decision making as it is sunk in nature because it will have to be incurred whether the units is purchased from outside or manufactured by the copany itself.
3. If the free capacity can be used by the company for any other project, then the company should purchase the carburetors from outside suppliers as this will lead to a net profit of 136,000 (170,000 - 34,000) from the new project. And if company still manufactures the carburetors units itself, then there will be a loss of 51,000 to the company.
Calculation of Loss of 51,00 to the company if units are manufactured by company itself:
Cost of Units if purchased from outside supplier = 544,000 (17,000*32)
Cost of Units if manufactured by company itself:
Variable Cost = 425,000 (238,000+136,000+51,000)
Segment Margin of the new project less loss due to purchase from outside = 170,000 - 17,000*(34-32) = 136,000
Total Cost = 136,000+ 425,000 = 561,000
Net Loss to Company = 561,000 - 544,000 = 17,000
4. Yes, the outsider offer should be accepted in this case as this will lead to profit to the company.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.