This question is from chapter 12 of Managerial Accounting 16 th edition by Ray G

Question

This question is from chapter 12 of Managerial Accounting 16th edition by Ray Garrison.

Exercise 12-3 Make or Buy Decision [LO12-3] 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 $30 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: 13,000 Units Per Unit Year Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost $ 13 $ 169,000 9 117,000 39,000 3* 39,000 78,000 34 442,000 One-third supervisory salaries, two-thirds depreciation of special equipment (no resale value) 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 13,000 carburetors from the outside supplier? 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 $130,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 13,000 carburetors from the outside supplier? Financial (disadvantage) Financial advantage

Explanation / Answer

1) Differential analysis :

Financial disadvantage = -52000

2) Differential analysis :

Financial advantage = 78000

Make Buy Direct material 169000 Direct labour 117000 Variable manufacturing overhead 39000 Fixed manufacturing overhead 13000 Purchase cost 13000*30 390000 Total 338000 390000

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