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: 23,000 Units Per Direct materiala Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost Unit Per Year $16 368,000 207,000 92,000 6 138, 000 207,000 $ 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 $230,000 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? Complete this question by entering your answers in the tabs below Required 1Required 2 Required 3 Required 4 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? Required 2 >

Explanation / Answer

1) calculate financial advantage and disadvantage :

Financial disadvantage = (713000-851000) = -138000

2) No

3) calculate financial advantage and disadvantage :

Financial advantage = (943000-851000) = 92000

4) Yes

Make Buy Direct material 368000 Direct labour 207000 Variable overhead 92000 Fixed overhead (138000/3) 46000 Purchase cost (23000*37) 851000 Total relevant cost 713000 851000

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