1 answer

Check my Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The...

Question:

Check my Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced al
Check my 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 $30 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally 12,000 Per Units Unit Per Year $ 12 $ 144,000 96,000 24,000 108,000 144,000 $ 43 $ 516,000 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost 2 *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 12,000 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 $120,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 12,000 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. Required 1 Required 2 Required 3 Required 4 suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a segment margin of the new product would be $120,000 per year. Given this new assumption, what would be advantage (disadvantage of buying 12,000 carburetors from the outside supplier? Financial advantage 104.nl

Answers

1) Differential analysis

Make Buy
Direct material 144000
Direct labor 96000
Variable overhead 24000
Fixed overhead (108000/3) 36000
Purchase cost (12000*30) 360000
Total relevant cost 300000 360000

Financial (disadvantage) = 300000-360000 = -60000

2) No

3) Differential analysis

Make Buy
Direct material 144000
Direct labor 96000
Variable overhead 24000
Fixed overhead (108000/3) 36000
Opportunity Cost 120000
Purchase cost (12000*30) 360000
Total relevant cost 420000 360000

Financial advantage = 420000-360000 = 60000

4) Yes

.

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