Troy Engines, Ltd., manufactures a varlety of engines for use in heavy equipment

Question

Troy Engines, Ltd., manufactures a varlety 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 $33 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor Internally 18,000 Units Per Year Per Unit Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost $15 270,000 9 162,000 72,000 6* 108,000 9 162,000 $43 774,000 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 18,000 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 $180,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 18,000 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 18,000 carburetors from the outside supplier?

Explanation / Answer

Answer:-

1)-If the company has no alternative facilities that are now being used to produce the carburetors , the financial disadvantages of buying 18000 units from outside supplier is

($33.00 per unit -$30.00 per unit)*18000 units =$54000

2)-Hence outside supplier’s offer should not be accepted.

3)-If carburetors is purchase from outside supplier then Troy engines can the use the freed capacity to launch a new product & segment margin from new product will be $180000

Hence financial advantages will be =Segment margin from new product-Loss on purchase from outside supplier

                      =$180000-$54000 =$126000

Hence the impact on the company’s overall net operating income of buying carburetors from the outside supplier would be net operating income would increase by $126000 per year.

4)- Hence outside supplier’s offer should be accepted.

Explanation:- 1)Depreciation on special equipment is a sunk cost hence it is not a relevant cost, hence not considered.

2)- Fixed manufacturing overhead allocated are unavoidable fixed cost hence not considered in relevant cost, it is continue to occur whether to manufacture the product or buy the product.

Troy Engines Ltd. Statement of comprative cost Manufaturing Amount Purchase from outside Amount Per unit $ Per unit $ Direct Material        15.00 Purchase Cost        33.00 Direct Labor          9.00 Vaiable Manufaturing Overhead          4.00 Fixed Manufaturing overhead traceable ($6*1/3)          2.00 Total Manufaturing cost        30.00 Total Purchase cost        33.00

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