Exercise 11-3 (Static) Make or Buy Decision [LO11-3]

Troy Engines, Limited, 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, Limited, for a cost of $35 per unit. To evaluate this offer, Troy Engines, Limited, has gathered the following information relating to its own cost of producing the carburetor internally:

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 suppliers offer be accepted?

3. Suppose that if the carburetors were purchased, Troy Engines, Limited, 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 suppliers offer be accepted?

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Direct materials Direct labor Variable manufacturing overhead Per Unit $ 14 10 3 15,000 Units per Year $ 210,000 150,000 45,000 90,000 Fixed manufacturing overhead, traceable 6* Fixed manufacturing overhead, allocated Total cost 9 135,000 $ 42 $ 630,000 *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). Direct materials Direct labor Variable manufacturing overhead Per Unit $ 14 10 3 15,000 Units per Year $ 210,000 150,000 45,000 90,000 Fixed manufacturing overhead, traceable 6* Fixed manufacturing overhead, allocated Total cost 9 135,000 $ 42 $ 630,000 *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).