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 $34 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 $ 14 $ 294,000
Direct labor 12 252,000
Variable manufacturing overhead 2 42,000
Fixed manufacturing overhead, traceable 9 * 189,000
Fixed manufacturing overhead, allocated 12 252,000
Total cost $ 49 $ 1,029,000
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 17,000 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 $170,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 17,000 carburetors from the outside supplier?
4. Given the new assumption in requirement 3, should the outside supplier’s offer be accepted?

Answer 1

Troy Engines, Ltd.

1. Financial advantage of buying from outside supplier = $51,000 ($629,000 - $578,000)

2. The outside supplier's offer should be accepted.

3. The financial advantage would increase by $170,000 to $221,000.

4. The outside supplier's offer should still be accepted.

Step-by-step explanation:

a) Data and Calculations:

Outside supplier's selling price = $34 per unit

Costs of producing in-house:

Per Unit 21,000 Units Per Year

Direct materials $ 14 $ 294,000

Direct labor 12 252,000

Variable manufacturing overhead 2 42,000

Fixed manufacturing overhead, traceable 9 * 189,000

Fixed manufacturing overhead, allocated 12 252,000

Total cost $ 49 $ 1,029,000

Cost of buying 17,000 carburetors from the outside supplier at $34 per unit = $578,000

Relevant cost of making 17,000 carburetors in-house ($37 * 17,000) = $629,000

1. Financial advantage of buying from outside supplier = $51,000 ($629,000 - $578,000)

2. The outside supplier's offer should be accepted.

3. The financial advantage would increase by $170,000 to $221,000.

4. The outside supplier's offer should still be accepted.