Question

EXERCISE 12-3 MOR OF Buy Decision L012-3 to its own cost of producing the carburetor internally: Per Unit 15,000 Units per Year Direct materials .. Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost $14 10 3 6 9 $42 $210,000 150,000 45,000 90,000 135,000 $630,000 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 pro- duce the carburetors, what would be the financial advantage (disadvantage) of buying 15,000 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 capac- ity to launch a new product. The segment margin of the new product would be $150,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying carburetors from the outside 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 4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted?

Answer 1

Answer is attached below

Answer 1 Statement showing Total Cost if Carburetors are produced and bought from Outside supplier Cost per unit 35 Cost of 15,000 Units Make Buy 5,25,000 Outside purchase price 14 Direct Materials Direct Labor Variable Overhead Supervisory salaries (Avoidable Fixed Cost) Depreciation on Special Equipment Other Manufacturing Overhead 10 3 2 2,10,000 1,50,000 45,000 30,000 4 9 42 4,35,000 5,25,000 Supervisory salaries = 1/3 * 6 = 2 Depreciation on special equipment = 2/3 * 6 = 4 $ 90,000 Financial Disadvantage of Buying 15,000 units from outside supplier = (525,000 - 435,000)

Answer 2 No, Outside supplier's offer should not be accepted as there is a Financial disadvantage of $90,000 Answer 3 Calculation of Net Incremental Benefit Financial Disadvantage (calculated above) Additional Segment Margin (if offer accepted) Net Incremental Benefit 90,000 1,50,000 60,000 Financial Advantage of Buying 15,000 units from outside supplier = $60,000 Answer 4 Yes, the supplier's offer should be accepted as there is Net Incremental benefit of $60,000