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 $36 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: 20,000 Units Per Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost Unit Per Year $17 $ 340,000 200,000 40,000 180,000 240,000 $ 50 $1,000,000 10 12 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 20,000 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 $200,000 per year. Given this new supplier? assumption, what would be financial advantage (disadvantage) of buying 20,000 carburetors from the outside

Explanation / Answer

1 Per unit Total Make Buy Make Buy Direct materials 17 340000 Direct labor 10 200000 Variable manufacturing overhead 2 40000 Fixed manufacturing overhead traceable 3 60000 Purchase cost 36 720000 Total 640000 720000 Financial disadvantage = $80000(720000-640000) 1b No, reject 2a Make Buy Total cost 640000 720000 Opportunity cost 200000 Total relevant cost 840000 720000 Financial advantage $120000(840000-720000) 2b Yes, Accept

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