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 $40 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 18,000 Units Per Year Direct materials $ 18 $ 324,000 Direct labor 9 162,000 Variable manufacturing overhead 2 36,000 Fixed manufacturing overhead, traceable 9* 162,000 Fixed manufacturing overhead, allocated 12 216,000 Total cost $ 50 $ 900,000 *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 18,000 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 $180,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 18,000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3, should the outside supplier’s offer be accepted?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Exercise 13-3 (Algo) Make or Buy Decision [LO13-3]

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 $40 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	18,000 Units Per Year
Direct materials	$ 18	$ 324,000
Direct labor	9	162,000
Variable manufacturing overhead	2	36,000
Fixed manufacturing overhead, traceable	9*	162,000
Fixed manufacturing overhead, allocated	12	216,000
Total cost	$ 50	$ 900,000

*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 18,000 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 $180,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 18,000 carburetors from the outside supplier?

4. Given the new assumption in requirement 3, should the outside supplier’s offer be accepted?

Exercise 13-3 (Algo) Make or Buy Decision [LO13-3]
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 $40 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
18,000 Units
Unit
Per Year
$ 324,000
162,000
36,000
Direct materials
$ 18
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead, traceable
Fixed manufacturing overhead, allocated
2
9*
162,000
12
216,000
Total cost
$ 50
$ 900,000
*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 18,000 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 $180,000 per year. Given this new assumption, what would be the financial advantage
(disadvantage) of buying 18,000 carburetors from the outside supplier?
4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted?
Complete this question by entering your answers in the tabs below.
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Required 4
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 18,000 carburetors from the outside supplier?
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