Troy Engines Ltd manufactures a variety of engines for use i

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: 12,000 Units Per Year Per Unit Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost $12 $ 144,000 96,000 24,000 9 108,000 144,000 $43 $ 516,000 12 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 12,000 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 $120,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 12,000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3, should the outside supplier\'s offer be accepted?

Solution

1 Per unit Total Make Buy Make Buy Direct materials 12 144000 Direct labor 8 96000 Variable manufacturing overhead 2 24000 Fixed manufacturing overhead traceable 3 36000 Purchase cost 30 360000 Total 300000 360000 Financial (disadvantage) ($60000) 2 No 3 Make Buy Total cost 300000 360000 Opportunity cost 120000 Total relevant cost 420000 360000 Financial advantage $60000