Troy Engines, Limited, manufactures a variety of engines for use in heavy equipment. The company has always produced all of the parts for its engines, including the carburetors. An outside supplier 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, summarized the cost of producing the carburetor internally as follows: Per Unit 15,000 Units Per Year Direct materials $ 14 $ 210,000 Direct labor 10 150,000 Variable manufacturing overhead 3 45,000 Fixed manufacturing overhead, traceable 6* 90,000 Fixed manufacturing overhead, allocated 9 135,000 Total cost $ 42 $ 630,000 *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). Required: If the company has no alternative use for the facilities being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 15,000 carburetors from the outside supplier? Should the outside supplier’s offer be accepted? Suppose if the carburetors were purchased, Troy Engines, Limited, could use the freed capacity to launch a new product with a segment margin of $150,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 15,000 carburetors from the outside supplier? Given the new assumption in requirement 3, should the outside supplier’s offer be accepted?

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

	Per Unit	15,000 Units Per Year
Direct materials	$ 14	$ 210,000
Direct labor	10	150,000
Variable manufacturing overhead	3	45,000
Fixed manufacturing overhead, traceable	6*	90,000
Fixed manufacturing overhead, allocated	9	135,000
Total cost	$ 42	$ 630,000

If the company has no alternative use for the facilities being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 15,000 carburetors from the outside supplier?
Should the outside supplier’s offer be accepted?
Suppose if the carburetors were purchased, Troy Engines, Limited, could use the freed capacity to launch a new product with a segment margin of $150,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 15,000 carburetors from the outside supplier?
Given the new assumption in requirement 3, should the outside supplier’s offer be accepted?

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