Question

Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has...

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 $37 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 23,000 Units
per Year
Direct materials $ 16 $ 368,000
Direct labor 9 207,000
Variable manufacturing overhead 4 92,000
Fixed manufacturing overhead, traceable 6 * 138,000
Fixed manufacturing overhead, allocated 9 207,000
Total cost $ 44 $ 1,012,000

*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).

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 23,000 carburetors from the outside supplier?

Financial advantage or disadvantage?

$

Should the outside supplier’s offer be accepted? Yes or no

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 $230,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 23,000 carburetors from the outside supplier?

Financial advantage or disadvantage
$   

Given the new assumption in requirement 3, should the outside supplier’s offer be accepted? Yes or no

Homework Answers

Answer #1

1) Differential analysis

Make buy
Direct material 368000
Direct labor 207000
Variable overhead 92000
Fixed overhead (138000/3) 46000
Purchase cost (23000*37) 851000
Total relevant cost 713000 851000

Financial (disadvantage) = 713000-851000 = -138000

2) No

2) Differential analysis

Make buy
Direct material 368000
Direct labor 207000
Variable overhead 92000
Fixed overhead (138000/3) 46000
Opportunity Cost 230000
Purchase cost (23000*37) 851000
Total relevant cost 943000 851000

Financial advantage = 943000-851000 = 92000

4) Yes

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