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 $36 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: 15,000 Units Per Per Unit Year Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated $ 12 $ 180, 000 180,000 60,000 90,000 135,000 $ 43 $ 645, 000 12 6* Total cost "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 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 segment margin 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?
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 $36 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: 15,000 Units Per Per Unit Year Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated $ 12 $ 180, 000 180,000 60,000 90,000 135,000 $ 43 $ 645, 000 12 6* Total cost "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 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 segment margin 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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:**Troy Engines, Ltd. Carburetor Production Cost Analysis**
Troy Engines, Ltd. manufactures various engines for heavy equipment, traditionally producing all necessary components, including carburetors, internally. An outside supplier recently offered to supply carburetors at $36 each. To evaluate this offer, the following internal production cost details were compiled for 15,000 units per year:
| **Cost Item** | **Per Unit** | **Total (Per Year)** |
|-----------------------------------------|--------------|----------------------|
| Direct materials | $12 | $180,000 |
| Direct labor | $12 | $180,000 |
| Variable manufacturing overhead | $4 | $60,000 |
| Fixed manufacturing overhead, traceable*| $6 | $90,000 |
| Fixed manufacturing overhead, allocated | $9 | $135,000 |
| **Total cost** | **$43** | **$645,000** |
*Note: One-third of supervisory salaries and two-thirds depreciation of special equipment (with no resale value).
**Required:**
1. **Alternative Use:** Assuming the company has no alternative use for the facilities currently used for carburetor production, calculate the financial advantage or disadvantage of producing vs. buying 15,000 carburetors.
2. **Supplier Offer:** Should the offer from the outside supplier be accepted?
3. **New Product Launch:** If purchased, the freed capacity could be used to produce a new product with an annual segment margin of $150,000.
4. **Re-evaluation:** Given the assumption in point 3, should the supplier's offer be accepted?
This analysis examines the financial implications and strategic opportunities related to manufacturing decisions.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education