2 Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipme

Question

2 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 $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: points 18,eee Units Per Direct materials Direct labor variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost Unit Per Year 15 $ 27e,eee 162,eee 72,99e 6 103,eee 162,0ee 9 eBook Hint S43 774,eee One-third supervisory salaries: two-thirds depreciation of special equipment (no resale value). Print Requlred 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 theutside 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? References Complete this question by entering your answers in the tabs below. Required1 Required 2 Rquired 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? inancial advantage

Explanation / Answer

1)Fixed cost allocated is irrelevant while making decision as it will be incurred whether offer is accepted or not however fixed cost (traceable) that is avoidable due to acceptance of offer is relevant

Depreciation: irrelevant as asset has no other use

SUpervisory salary :6*1/3=2

Financial disadvantage from purchasing from outside suppliers is 594000-540000= 54000

2)No offer should not be accepted.

3)Financial advantage : -54000 (incremental cost of purchase ) +180000 (incremental revenue) =$126000

4)Offer should be accepted as it will result in net benefit of 126000

If manufactured If purchased Direct material 15 Direct labor 9 variable overhead 4 Fixed overhead -traceable (supervisory salary) 2 Purchase cost 33 Total per unit cost 30 33 Units 18000 18000 Total cost 540000 594000

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