Question

15. 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	15,000 units per Year
Direct Materials	$14	$210,000
Direct Labor	10	150,000
Variable manufacturing overhead	3	45,000
Fixed manufacturing overhead, traceable	6*	90,000
Fixed manufacturing overhead, allocated	9	135,000
Total	$42	$630,000
*One-third is for supervisory salaries; two-thirds is for depreciation

a. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, should the outside supplier's offer be accepted? Show all computations

b. 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. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $35 per unit? Show all computations –

Answer 1

(a) The outside supplier's offer shoud not be accepted, since it will cost addtional $90,000

	Manufactured	Outsourced
Direct Materials	$          210,000	$                -
Direct Labor	$          150,000	$                -
Variable manufacturing overhead	$            45,000	$                -
Supervisory Salary	$            30,000	$                -
Purchase cost	$                      -	$     525,000
Total Cost	$          435,000	$     525,000

*Supervisor salary will be saved if purchased units from outisde.

Depreciation and allocated fixed cost will be incurred irrespective of units manufactured or purchased from outside.

(b) Troy Engines, Ltd., should accept the offer to buy the carburetors for $35 per unit.

	Manufactured	Outsourced
Direct Materials	$          210,000	$                -
Direct Labor	$          150,000	$                -
Variable manufacturing overhead	$            45,000	$                -
Supervisory Salary	$            30,000	$                -
Purchase cost	$                      -	$     525,000
Segment margin of the new product	$                      -	$ (150,000)
Total Cost	$          435,000	$     375,000