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 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 $36 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 Unit / 20,000 Units Per Year

Direct materials $ 17 / $ 340,000

Direct labor 10 / 200,000

Variable manufacturing overhead 2 / 40,000

Fixed manufacturing overhead, traceable 9 / 180,000

Fixed manufacturing overhead, allocated 12 / 240,000

Total cost $ 50 / $ 1,000,000

*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 20,000 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 $200,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 20,000 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 20000 units Make Buy Make Buy Direct materials 17 340000 Direct labor 10 200000 Variable manufacturing overhead 2 40000 Fixed manufacturing overhead, traceable 3 60000 Purchase cost 36 720000 Total costs 640000 720000 Financial advantage = $80000(720000-640000) 2 No, the outside supplier’s offer should not be accepted 3 Make Buy Total costs 640000 720000 Opportunity costs 200000 Total relevant costs 840000 720000 Financial disadvantage = $120000(840000-720000) 4 Yes, the outside supplier’s offer should be accepted

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.