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?

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 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?

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?

	Yesradio button unchecked1 of 2 Noradio button unchecked2 of 2

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 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?

	Yesradio button unchecked1 of 2 Noradio button unchecked2 of 2

Answer 1

1	Statement of Cost Analysis
		Make	Buy	Incremental (cost) or benefit
	Purchase Price	$                       -	$      819,000.00	$      (819,000.00)
	Direct Material	$      378,000.00	$                       -	$        378,000.00
	Direct labor	$      231,000.00	$                       -	$        231,000.00
	Variable Manufacturing Overheads	$        63,000.00	$                       -	$          63,000.00
	Fixed Manufacturing Overheads, Traceable	$        63,000.00	$        42,000.00	$          21,000.00
	Fixed Manufacturing Overheads, Allocated	$      126,000.00	$      126,000.00	$                          -
		$      861,000.00	$      987,000.00	$      (126,000.00)
	Note- In Traceable fixed cost Manager salary is Avoidable but depreciation is not.

Answer 2

The Supplier's Offer should not be accepted , since it has higher cost than Manufacturing.

Answer 3	Statement of Cost Analysis
		Make	Buy	Incremental (cost) or benefit
	Purchase Price	$                       -	$      819,000.00	$      (819,000.00)
	Direct Material	$      378,000.00	$                       -	$        378,000.00
	Direct labor	$      231,000.00	$                       -	$        231,000.00
	Variable Manufacturing Overheads	$        63,000.00	$                       -	$          63,000.00
	Fixed Manufacturing Overheads,Tracable	$        63,000.00	$        42,000.00	$          21,000.00
	Fixed Manufacturing Overheads,Allocated	$      126,000.00	$      126,000.00	$                          -
		$      861,000.00	$      987,000.00	$      (126,000.00)

	Total Extra cost in Buying carburetor	$   (126,000.00)
	Less: Benefit to be achieved by accepting offer	$      210,000.00
	Net (Cost) or benefit by acceptance of offer	$        84,000.00