Question

In: Accounting

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 $35 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 16,000 Units
Per Year
Direct materials $ 13 $ 208,000
Direct labor 13 208,000
Variable manufacturing overhead 2 32,000
Fixed manufacturing overhead, traceable 9 * 144,000
Fixed manufacturing overhead, allocated 12 192,000
Total cost $ 49 $ 784,000

*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 16,000 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 $160,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 16,000 carburetors from the outside supplier?

4. Given the new assumption in requirement 3, should the outside supplier’s offer be accepted?

Solutions

Expert Solution

Solution 1:

Computation of Financial Advantage (Disadvantage)

Make

Buy Financial advantage (disadvantage)
Direct materials $208,000.00 $0.00 $208,000.00
Direct labor $208,000.00 $0.00 $208,000.00
Variable manufacturing overhead $32,000.00 $0.00 $32,000.00
Fixed manufacturing overhead, traceable $144,000.00 $96,000.00 $48,000.00
Fixed manufacturing overhead, allocated $192,000.00 $192,000.00 $0.00
Purchase price (16000 x $35) $0.00 $560,000.00 -$560,000.00
Total costs $784,000.00 $848,000.00 -$64,000.00

Solution 2:

No, Outside supplier’s offer should not be accepted as there is financial disadvantage of $64000.

Solution 3:

Computation of Financial Advantage (Disadvantage)

Make

Buy Financial advantage (disadvantage)
Direct materials $208,000.00 $0.00 $208,000.00
Direct labor $208,000.00 $0.00 $208,000.00
Variable manufacturing overhead $32,000.00 $0.00 $32,000.00
Fixed manufacturing overhead, traceable $144,000.00 $96,000.00 $48,000.00
Fixed manufacturing overhead, allocated $192,000.00 $192,000.00 $0.00
Opportunity cost (Segemnt Margin of New Product $160,000.00 $0.00 $160,000.00
Purchase price (16000 x $35) $0.00 $560,000.00 -$560,000.00
Total costs $944,000.00 $848,000.00 $96,000.00

Solution 4:

Yes, Outside supplier’s offer should be accepted as there is financial advantage of $96000.


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