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 necessarý 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, 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 financial advantage dvantage) of buvina 17.000 carburetors from the outside supnlier?

Explanation / Answer

1. Financial (disadvantage): $102000

2. No.

The outside supplier's offer should not be accepted as it would result in a financial disadvantage.

3. Financial advantage: $68000

Make Buy Financial advantage (disadvantage) Direct materials 238000 0 238000 Direct labor 136000 0 136000 Variable manufacturing overhead 51000 0 51000 Fixed manufacturing overhead, traceable 51000 34000 17000 Fixed manufacturing overhead, allocated 102000 102000 0 Purchase price (17000 x $32) 0 544000 -544000 Total costs $ 578000 680000 -102000

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