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 $34 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: Per Unit 21,000 Units
Per Year
Direct materials $ 14 $ 294,000
Direct labor 12 252,000
Variable manufacturing overhead 2 42,000
Fixed manufacturing overhead, traceable 9 * 189,000
Fixed manufacturing overhead, allocated 12 252,000
Total cost $ 49 $ 1,029,000
*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).
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 21,000 carburetors from the outside supplier?
Financial (disadvantage)
2. 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 $210,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 21,000 carburetors from the outside supplier?
Financial advantage

1. Financial disadvantage ($63,000)

2. Financial advantage $147,000

Explanation:

1. Calculation to determine what would be the financial advantage (disadvantage)

Per Unit

Differential

Costs 21,000 Units

Make Buy Make Buy

Cost of purchasing

$0 $34 $0 $714,000

($34*21,000 Units=$714,000)

Direct materials

$14 $294,000 $0 $0

Direct labor

$12 $0$252,000 $0

Variable manufacturing overhead

$2$0 $42,000$0

Fixed manufacturing overhead, traceable1

$3 $0 $63,000 $0

($9 per unit × 1/3=$3)

Fixed manufacturing overhead, common

$0 $0 $0 $0

Total costs$31$34$651,000 $714,000

Financial (disadvantage) of buying the carburetors$ (3)$ (63,000)

($31-$34=$3)

($651,000-$714,000=-$63,000)

Based on the above information the company should REJECT the offer and they should CONTINUE TO PRODUCE the carburetors internally.

Therefore the FINANCIAL DISADVANTAGE of buying 21,000 carburetors from the outside supplier is ($63,000)

2. Calculation to determine the financial advantage (disadvantage)

Make Buy

Cost of purchasing $0 $714,000

($34*21,000 Units=$714,000)

Cost of making$651,000 $0

($294,000+$252,000+$42,000+$63,000)

Opportunity cost—segment margin foregone on a potential new product line $210,000 $0

Total cost$861,000$714,000

Financial advantage of buying the carburetors $147,000

($861,000-$714,000=$147,000)

Based on the above calculation, the company should ACCEPT the offer and thereby PURCHASE the carburetors from the outside supplier.

Therefore what would be FINANCIAL ADVANTAGE of buying 21,000 carburetors from the outside supplier is $147,000

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