Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment
ID: 2538977 • Letter: T
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 $39 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 er Unit Per Year $18 $ 378,000 231,000 63,000 63,000 126,000 $41 $ 861,000 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable 3" Fixed manufacturing overhead, allocated Total cost 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 fro 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 Required1Required 2Required 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 21,000 carburetors from the outside supplier?Explanation / Answer
1) Cost of buying = $39 per unit
Total Relevant Cost for Buy option = 21,000 units*$39 = $819,000
Relevant cost for Make option = Direct Materials+Direct Labor+Variable manufacturing OH+Fixed OH, traceable
= $18+$11+$3+($3*1/3) = $18+$11+$3+$1
= $33 per unit
(Fixed manufacturing OH non traceable will not be included in Relevant cost. Out of fixed manufacturing oH, traceable, only one third supervisory salary is relevant and will be included) ($3*1/3 = $1 per unit)
Total Relevant cost for Make option = 21,000 units*$33 per unit = $693,000
Financial Disadvantage of buying = Relevant cost for Buy Option - Relevant cost for Make option
= $819,000 - $693,000 = $126,000
Thus there is a financial disadvantage of $126,000 of buying 21,000 carburetors from the outside supplier.
2) As there is a financial disadvantage of $126,000 of buying carburetors from the outside supplier, the outside supplier's offer should not be accepted.
3) If there is a benefit of $210,000 from the freed capacity then the relevant cost of buying will decrease by amount of benefit.
Relevant cost of Buy option = (21,000 units*$39) - $210,000
= $819,000 - $210,000 = $609,000
Relevant cost of Make option = $693,000 (as calculated in requirement 1)
Financial advantage of Buying = Relevant cost of Make option - Relevant cost of Buy option
= $693,000 - $609,000 = $84,000
Thus there is a financial advantage of $84,000 of buying 21,000 carburetors from the outside supplier.
4) As there is a financial advantage of $84,000 of buying carburetors from the outside supplier, the outside supplier's offer should be accepted.
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