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 $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: Direct materials Direct labor Variable overhead Supervisory salaries Equipment costs Total cost Per Unit 15,000 Units 3 Per Year $14 $ 210,000 10 150,000 45,000 2 30,000 13 195,000 $ 42 $630,000 Required: 1. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors (which means equipment cost is unavoidable), what would be the financial advantage (disadvantage) of buying 15,000 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 additional profit of the new product would be $150,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 15,000 carburetors from the outside supplier?
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 $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: Direct materials Direct labor Variable overhead Supervisory salaries Equipment costs Total cost Per Unit 15,000 Units 3 Per Year $14 $ 210,000 10 150,000 45,000 2 30,000 13 195,000 $ 42 $630,000 Required: 1. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors (which means equipment cost is unavoidable), what would be the financial advantage (disadvantage) of buying 15,000 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 additional profit of the new product would be $150,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 15,000 carburetors from the outside supplier?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Subject : Finance
Transcribed Image Text: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 $35 per unit. To evaluate this offer, Troy Engines, Ltd., has
gathered the following information relating to its own cost of producing the carburetor
internally:
Direct materials
Direct labor
Variable overhead
Supervisory salaries
Equipment costs
Total cost
15,000
Units
Per
Per
Unit
Year
$ 14 $ 210,000
10
150,000
3
45,000
30,000
195,000
$630,000
2
13
$ 42
Required:
1. Assuming the company has no alternative use for the facilities that are now being used
to produce the carburetors (which means equipment cost is unavoidable), what would
be the financial advantage (disadvantage) of buying 15,000 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 additional profit of the new product would be
$150,000 per year. Given this new assumption, what would be the financial advantage
(disadvantage) of buying 15,000 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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