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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 12,000 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 $120,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 12,000 carburetors from the outside supplier?

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Requirement 1: Per unit differential cost Make 12,000 units Make Buy Buy Cost of purchasing 30 360,000 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable 12 144,000 96,000 24,000 36,000 8 (Refer note 1) Fixed manufacturing overhead, common Total costs 25 300,000 Difference in favor of continuing to make the carburetors 60,000 ($30-$25) ($360,000- $300,000) The disadvantage of buying 12,000 carburetors is $60,000 Note 1: Only the supervisory salaries can be avoided if the carburetors are purchased. The remaining book value of the special equipment is a sunk cost hence, the $6 (2/3 *9) per unit depreciation expense is not relevant to this decisionRequirement 2: Based on the above data, the company should reject the offer and should continue to produce the carburetors internally. Requirement 3: Make Buy Cost of purchasing (From above 1) Cost of making (From above 1) Opportunity cost - segment margin forgone on a potential new product line 360,000 300,000 120,000 Total cost Difference in favor of purchasing from the outside supplier The advantage of buying 12,000 carburetors is $60,000 Requirement 4: Thus, the company should accept the offer and purchase the carburetors from the outside supplier. ($420,000- $ 360,000)

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