Item$3$

$1\mathrm{.}42$points

Return to question

Item $3$

Exercise $13-3($Algo$)$ Sourcing Decisions $[$LO$13-3]$

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 $$37$ per unit. To evaluate this offer, Troy Engines, Limited, summarized the cost of producing the carburetor internally as follows:

$$Per Unit$23,000$ Units Per YearDirect materials$ $16$$ $368,000$Direct labor$9207,000$Variable manufacturing overhead$492,000$Fixed manufacturing overhead, traceable$6*138,000$Fixed manufacturing overhead, allocated$9207,000$Total cost$ $44$$ $1,012,000$

$*$One$-$third supervisory salaries; two$-$thirds depreciation of special equipment $($no resale value$).$

Required:

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 $23,000$ carburetors from the outside supplier?

Should the outside supplier$$s offer be accepted?

Suppose if the carburetors were purchased, Troy Engines, Limited, could use the freed capacity to launch a new product with a segment margin of $$230,000$ per year. Given this new assumption, what would be the financial advantage $($disadvantage$)$ of buying $23,000$ carburetors from the outside supplier?

Given the new assumption in requirement $3,$ should the outside supplier$$s offer be accepted?