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 $39 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				21,000 Units per Year
Direct materials	$	18		$	378,000
Direct labor		11			231,000
Variable manufacturing overhead		3			63,000
Fixed manufacturing overhead, traceable		3	*		63,000
Fixed manufacturing overhead, allocated		6			126,000
Total cost	$	41		$	861,000

*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 21,000 carburetors from the outside supplier?

2. Should the outside supplier’s offer be accepted? yes or no

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 $210,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 21,000 carburetors from the outside supplier?

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

Answer 1

Required 01 Financial Disadvantage

The Troy Engines limited may Face loss by Accepting Ousiders Company offer Because the cost to company by making is $ 672000 and by Accepting offer it goes to $890000 so the company will face loss of $147000 its huge Disadvantage for troy Engines limited.

Required 03 Financial advantage

The Troy Engines limited may Face loss by Accepting Ousiders Company offer Because the cost to company by making is $ 693000 and by Accepting offer it goes to $890000 and it also includes margin segment of $21000 so the company will face of $126000 its huge advantage for troy Engines limited.