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 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: Per Units Direct materlals Variable manufacturing overhead Pixed manufacturing overhead, allocated Total cost Direct labor 9 117,e00 39,000 3 39,000 678,909 S34 $442,000 One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). 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 13,000 carburetors from the outside supplier? 2. Should the outside supplier's offer be accepted? 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 financial advantage (disadvantage) of buying 13,000 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 2 Required 3 Assuming the company has no alternative use for the facilities that are now being used to would be the financial advantage (disadvantage) of buying 13,000 carburetors from the outside supplier? Required 2>

Explanation / Answer

Rreq 1: Incremental income analysis Make Buy Net Income Increase/ (Decrease) Cost of manufacture Material 169,000 169,000 Labour 117000 117000 Variable OH 39000 39000 Fixed OH 39000 13000 26000 Cost of Supplier 390,000 -390,000 Differential cost 364000 403000 -39000 Note: Allcated fixed expense shall not be taken in to consideration while mainng decision. Req 2: As the differential cost has beenn increased by $ 39,000, the company shall: MAKE THE PRODUCT Req 3: Loss from buying the product -39000 Add: Contribution from idle capacity 130,000 Net inccrease in icnome 91000 Req 4: Yes,the outside supplies shall be accepted

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