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 $37 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 Units Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost $16 $ 368,08e 9 287,000 92,600 6 138,000 9287,e99 $44 $1,012,000 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 23,000 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 $230000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 23,000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted? K Prey 2 of 4E Next>

Explanation / Answer

per unit Differential cost 23,000 units make buy make Buy Cost of purchasing 37 851000 Direct materials 16 368000 direct labor 9 207000 variable manufacturing overhead 4 92000 fixed manufacturing overhead ,traceable 2 46000 fixed manufacturing overhead,common 0 0 total costs 31 37 713000 851000 Difference in favor of continuing to make the carburetors 6 138000 Make Buy 1a) total relevant cost (23,000 units) 713000 851000 1b) Reject 2a) make Buy cost of purchasing (part1) 851000 cost of making (part 1) 713000 opportunity cost- segment margin forgone 23,000 total cost 736000 851000 difference in favour of purchasing from outside supplier -115000 Make Buy total relevant cost 23,000 units) 736000 851000 2b) Accept

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