Per Unit 19,000 Units Per Year Direct materials $ 16 $ 304,000 Direct labor 10 190,000 Variable manufacturing overhead 2 38,000 Fixed manufacturing overhead, traceable 9* 171,000 Fixed manufacturing overhead, allocated 12 228,000
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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 $34 per unit. To evaluate this offer, Troy Engines, Limited, has gathered the following information relating to its own cost of producing the carburetor internally:
| Per Unit | 19,000 Units Per Year | |
|---|---|---|
| Direct materials | $ 16 | $ 304,000 |
| Direct labor | 10 | 190,000 |
| Variable manufacturing |
2 | 38,000 |
| Fixed manufacturing overhead, traceable | 9* | 171,000 |
| Fixed manufacturing overhead, allocated | 12 | 228,000 |
| Total cost | $ 49 | $ 931,000 |
*One-third supervisory salaries; two-thirds
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 19,000 carburetors from the outside supplier?
2. Should the outside supplier’s offer be accepted?
3. Suppose that if the carburetors were purchased, Troy Engines, Limited, could use the freed capacity to launch a new product. The segment margin of the new product would be $190,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 19,000 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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