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 $34 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: 21,000 Units Per Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost Unit Per Year $14 $ 294,000 252,000 42,900 9 189,000 252,000 $49 $1,029,000 12 2 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 21,000 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 $210,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 21,000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted?

Explanation / Answer

Answer 1

Answer 2

Since there is financial disadvantage of $ 63,000 of buying from outside supplier, the offer of outside supplier should not be accepted.

Answer 3

Assuming the capacity freed can be utilised for production of new product, the net result is as follows:

Answer 4

Since there is financial sadvantage of $ 147,000 of buying from outside supplier, the offer of outside supplier should be accepted.

Cost of Buying from Outside Supplier          7,14,000 Savings of Costs: - Direct Material          2,94,000 - Direct Labour          2,52,000 - Variable Mfg. Overhead             42,000 - Fixed Mfg. Overhead (Only Salary)             63,000 Net financial advantage / (disadvantage) of buying from outside supplier           (63,000)

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