Help Exercise 12-3 Make or Buy Decision [LO12-3] Troy Engines, Ltd., manufacture
ID: 2432451 • Letter: H
Question
Help Exercise 12-3 Make or Buy Decision [LO12-3] 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 T Engines, Ltd, fr a cost of $35 per unit. To evaluate this offer, Troy Engines, Ltd, has gathered the following information relating to its own cost of producing the carburetor internally: 15,000 Units Per Per Direct 1abor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fi $ 14 210,000 10 150,000 45,000 6 90,000 9 135,000 xed manufacturing overhead Total cost $ 42 $ 630,000 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 15,000 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 $150,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 15,000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted? Complete this auestion bv entering vour answers in the tabs below. K Prev2 of 6E Next >Explanation / Answer
1.
Relavent costs = Variable costs + Avoidable fixed costs
Relavent costs = Direct materials + Direct labour + Variable manufacturing overhead + Fixed manufacturing overhead*1/3
= (14*15,000) + (10*15,000) + (3*15,000) + (6*15,000*1/3)
= 210,000 + 150,000 + 45,000 + 30,000
= 435,000
Relavent costs to make = 435,000
Relavent costs to buy = 15,000 units * 35 per unit = 525,000
Financial disadvantage = 525,000 - 435,000 = 90,000
2.
No (as there is financial disadvantage)
3.
Relavent costs = Variable costs + Avoidable fixed costs + segment margin lost
Relavent costs = Direct materials + Direct labour + Variable manufacturing overhead + Fixed manufacturing overhead*1/3 + segment margin lost
= (14*15,000) + (10*15,000) + (3*15,000) + (6*15,000*1/3) + 150,000
= 210,000 + 150,000 + 45,000 + 30,000 +150,000
= 585,000
Relavent costs to make = 585,000
Relavent costs to buy = 15,000 units * 35 per unit = 525,000
Financial advantage = 585,000 - 525,000 = 60,000
4.
Yes (as there is financial advantage)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.