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 $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: 14, 000 Units er Unit $14 Per Year Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable 196,000 140, 000 56, 000 84, 000 126, 000 602, 000 ed nanut acturing ove rhead, allocated Total cost $43 $ 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 14,000 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 $140,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 14,000 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 1 Required 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 14,000 carburetors from the outside supplier?

Explanation / Answer

1 Per unit 14000 units Make Buy Make Buy Direct materials 14 196000 Direct labor 10 140000 Variable manufacturing overhead 4 56000 Fixed manufacturing overhead traceable 2 28000 Cost of purchasing 35 490000 Total cost 420000 490000 Financial disadvantage = $70000(490000-420000) 2 No, should not be accepted 3 Make Buy Total cost 420000 490000 Opportunity cost 140000 Total relevant cost 560000 490000 Financial advantage = $70000(560000-490000) 4 Yes, should be accepted

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