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 $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: Direet materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost 13,000 Units Per per Unit Year $ 13 $ 169,000 9 117,000 3 39,000 3* 39,000 6 78,000 $ 34 $ 442,000 "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 13.000 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 $130,000 per year. Given this new assumption, what would be the 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 1 Required 2 Required 3 Required 4 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 $130,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 13,000 carburetors from the outside supplier?

Answer 1

1) Statement Showing relevant cost of manufacturing (Avoidable cost for 13000 carburetors)

Pariculers Cost Per Unit Cost per 13000 Units

Direct Materials 13 169000

Direct Labor 9 117000

Variable Manufacturing Over Head 3 39000

  

Total Relevant cost of manufacturing 25 325000

Relevant cost of buying the carburetors from outside supplier 30 390000

     

Therefore Net Financial advantage/Disadvantage of Buying (5) (65000)

(2) Total relevant cost of Manufacturing is 325000 whereas he cost of buying the carburetors from outside supplier is 390000 which resulting into a financial disadvantage of 65000 Dollers. Assuming the company has no alternative use of its facilities that are being used now it is advisable to Manufacture the carburetors instead of buying from the outside supplier.

(3) Statement showing Financial Advantage/Disadvanage of Buying carburetors from outside supplier and company will be able to use the facilities to launch a new product.

Particulers Amount

Cost of Own Manufacturing(Calculated Above i.e (25*13000) 325000

Add : Segment margin of new product   130000

Less :Cost of Buying carburetors from outside (30*13000)   - 390000

Net Savings from Buying 65000

(4) Considering he net savings it is advisable to  Buy the  carburetors from outside supplier,

In case Troy Engines ltd decides to buy the carburetors from outside besides the savings in cost it must also taken in to account the following factors.

(i) Whether the outside supplier would be in a position o maintain the quality of the product

(ii) Whether the supplier would be regular in his supplies

(iii) Whether the supplier is reliable

(iv) What will be the behaviour of supplier during shortage of goods