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 $34 per unit. To evaluate this offer, Troy Engines, Limited, summarized the cost of producing the carburetor internally as follows:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead, traceable
Fixed manufacturing overhead, allocated
Total cost
Per 19,000 Units Per
Unit
Year
$ 16
$ 304,000
10
190,000
2
38,000
9*
171,000
12
228,000
$ 49
$ 931,000
"One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).
Required:
1. 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 19,000 carburetors from the outside supplier?
2. Should the outside supplier's offer be accepted?
3. Suppose If the carburetors were purchased, Troy Engines, Limited, could use the freed capacity to launch a new product with a
segment margin of $190,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying
19,000 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.
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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 19,000 carburetors from the outside supplier?
