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 suppller has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $40 per unit. To evaluate thls offer, Troy Engines, Ltd., has gathered the following information relating to Its own cost of producing the carburetor Internally: 15,808 Units Per Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost Unit per Year $15 $ 225,0ee 11 165,80e 30,000 9 135,9ee 180,90e $49 $ 735,0ee One-third supervisory salaries, two-thirds depreclation of special equipment (no resale value). Requirec 1. Assuming the company has no alternative use for the facilities that are now belng used to produce 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 capacity to launch a new product. The segment margin of the new product would be $150,000 per year. Glven thls new assumption, what would be the financlal advantage (disadvantage) of buying 15,000 carburetors from the outside supplier? 4. Glven 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 1Required 2 Required 3 Required 4 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 15,000 carburetors from the outside supplier? Required 1 Required2>

Answer 1

1) Differential analysis

	Make	Buy
Direct material	225000
Direct labor	165000
Variable manufacturing overhead	30000
Fixed manufacturing overhead (135000/3)	45000
Purchase cost (15000*40)		600000
Total relevant cost	465000	600000

Financial (disadvantage) = 465000-600000 = -135000

2) No, Outside supplier's offer should not be accepted

3) Differential analysis

	Make	Buy
Direct material	225000
Direct labor	165000
Variable manufacturing overhead	30000
Fixed manufacturing overhead (135000/3)	45000
Opportunity cost	150000
Purchase cost (15000*40)		600000
Total relevant cost	615000	600000

Financial advantage = 615000-600000 = 15000

4) Yes, Outside supplier's offer should be accepted