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Homework answers / question archive / Troy Engines, Ltd

Troy Engines, Ltd

Accounting

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 the 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?

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Solution

1

  Make buy
Direct material 378,000  
Direct labor 231,000  
Variable manufaturing overhead 63,000  
Fixed Manufacturing overhead traceable(63,000*1/3) 21,000  
Purchase cost   819,000
Total 693,000 819,000
     

Financial disadvantage = 819,000-693,000=126,000

2 no offer shouldn't be accepted

3

  Make buy
Direct material 378,000  
Direct labor 231,000  
Variable manufacturing overhead 63,000  
Avoidable Fixed Manufacturing overhead(63,000*1/2) 21,000  
Purchase cost   819,000
Loss of opportunity of new product margin 210,000  
Total 903,000 819,000

Financial advantage= 903,000-819,000= 84,000

4 yes, the outsider order should be accepted.

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