Question

Troy Engines, Limited, 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, Limited, for a cost of $35 per unit. To evaluate this offer, Troy Engines, Limited, has gathered the following information relating to its own cost of producing the carburetor internally: Unit Per 20,000 Units Per YearDirect materials $17 340,000 Direct labor 11 220,000Variable manufacturing overhead 3 60,000Fixed manufacturing overhead, traceable 3 60,000Fixed manufacturing overhead, allocated 6 120,000 Total cost $40 800,000Required: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 20,000 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 $200,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 20,000 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, Limited

1. The financial advantage of buying 20,000 carburetors from the outside supplier is $100,000.

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

3. The financial advantage of buying 20,000 carburetors from the outside supplier would be $300,000.

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

Step-by-step explanation:

a) Data and Calculations:

Outside supplier's selling price = $35 per unit

Total cost of buying from outside supplier = $700,000 ($35 * 200,000)

Segment margin of new product = $200,000

Internal production costs:

Unit Per 20,000 Units Per Year

Direct materials $17 340,000

Direct labor 11 220,000

Variable manufacturing overhead 3 60,000

Fixed manufacturing overhead, traceable 3 60,000

Fixed manufacturing overhead, allocated 6 120,000

Total cost $40 800,000

1. The financial advantage of buying 20,000 carburetors from the outside supplier is $100,000 ($800,000 - $700,000)

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

3. The financial advantage of buying 20,000 carburetors from the outside supplier would be $300,000 ($800,000 - $500,000)

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