Exercise 12-3 Make or Buy Decision [LO12-3] Troy Engines, Ltd., manufactures a v
ID: 2438817 • Letter: E
Question
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 Troy Engines, Ltd, for 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 Per Units Direct labor Variable manufacturing overhead Fixed manufacturi Fixed sanufacturing overhead, allocated Total cost Unit Per Yea s14 210,800 18 15e,ee0 45,000 6 98,e00 "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 ) 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 question by entering your answers in the tabs below.Explanation / Answer
Solution 1:
Solution 2:
As there is net financial disadvantage of $90,000 on buying from outside supplier, therefore outside supplier offer should not be accepted.
Solution 3:
Solution 4:
As there is net financial advantage of $60,000 on accepting outside supplier offer, therefore outside supplier offer should be accepted.
Differential Analysis- Troy Engines Ltd - Making Carbureator (alt 1) or Buying Carbureator (Alt2) Particulars Making Carbureator (Alt 1) Buying Carbureator (Alt 2) Financial advantage (Disadvantage) of buying (Alternative 2) Costs: Purchase Price (15000*$35) $0.00 $525,000.00 -$525,000.00 Direct material $210,000.00 $0.00 $210,000.00 Direct Labor $150,000.00 $0.00 $150,000.00 Variable overhead $45,000.00 $0.00 $45,000.00 Avoidable Fixed Overhead ($90,000*1/3) $30,000.00 $0.00 $30,000.00 Total Cost $435,000.00 $525,000.00 -$90,000.00Related Questions
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