Z # 8 Fall 2017 Help Save &Exit; Submit Saved Troy Engines, Ltd., manufactures a

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Z # 8 Fall 2017 Help Save &Exit; Submit Saved 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: 16,000 Units Per Year Per Unit Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost 16 $ 256,000 12 192,000 48,000 3 48,000 96,000 $40 $ 640,000 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 16,000 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 $160,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 16,000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted?

Explanation / Answer

1 Per unit 16000 units Make Buy Make Buy Direct materials 16 256000 Direct labor 12 192000 Variable manufacturing overhead 3 48000 Fixed manufacturing overhead, traceable 1 16000 Purchase cost 35 560000 Total costs 512000 560000 Financial disadvantage = $48000(560000-512000) 2 No, the outside supplier’s offer should not be accepted 3 Make Buy Total costs 512000 560000 Opportunity costs 160000 Total relevant costs 672000 560000 Financial advantage = 112000(672000-460000) 4 Yes, the outside supplier’s offer should be accepted

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