Exercise 12-3 Make or Buy Decision [LO12-3 Troy Engines, Ltd, manufactures a van
ID: 2519205 • Letter: E
Question
Exercise 12-3 Make or Buy Decision [LO12-3 Troy Engines, Ltd, manufactures a vanety of engines for use in heavy equipment. The company has always produced all of necessary parts for ts engines, Including all of the carburetors. An Engines, Ltd., for a cost of $30 per unit To eveluate this offer. Troy Engines. Ltd, has gathered the following Information relating to its own cost of producing the carburetor Internally the supplier has offered to sell one type of carburetor to Troy birect 1abor Fixed manufa Fixed manufacturing Total cost 12 144,eee One-third supenvisory saiaries two-thrds depreciation of pecial eupment no resale vaiuel 1. Assuming the company has no alternatve use for the tocities that are now being used to produce the carburetors, what would be h ancabeornigeieusge t the financial advantage (disadvantage) of buyling 12,000 carouretors from the outside supplier? 3. Suppose that f the carburetors were purchased. Troy Engines. Ltd, could use the freed 4 Given the new a segment margin of the new product would be $ 20.000 per year Given this new assumption, what (disadvantage) of buying 12000 carburetors from the outside supplier? would be inencial advantage in recuirement 3, should the outside suppliers offer be accepted?Explanation / Answer
1.
Relavent cost to buy = 30 * 12,000 units = 360,000
Relavent cost to make = (direct materials per unit + direct labour per unit + Variable manufacturing overhead per unit + avoidable fixed manufacturing overhead per unit) * 12,000 units
= [12 + 8 + 2 + (9*1/3)] * 12,000
= 300,000
Financial disadvantage of buying = 60,000 (300,000 - 360,000)
2.
NO (as there is financial disadvantage)
3.
Relavent cost to buy = 30 * 12,000 units = 360,000
Relavent cost to make = (direct materials per unit + direct labour per unit + Variable manufacturing overhead per unit + avoidable fixed manufacturing overhead per unit) * 12,000 units + Segment margin lost
= [12 + 8 + 2 + (9*1/3)] * 12,000 + 120,000
= 420,000
Financial advantage of buying = 60,000 (420,000 - 360,000)
4.
YES (as there is financial advantage)
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