Please do both! Thank You!!

Exercise 13-3 (Algo) Make or Buy Decision [LO13-3]

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 $34 per unit. To evaluate this offer, Troy Engines, Limited, 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).

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 21,000 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 $210,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 21,000 carburetors from the outside supplier?

4. Given the new assumption in requirement 3, should the outside suppliers offer be accepted?

Exercise 13-2 (Algo) Dropping or Retaining a Segment [LO13-2]

The Regal Cycle Company manufactures three types of bicyclesa dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:

	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	$ 933,000	$ 264,000	$ 409,000	$ 260,000
Variable manufacturing and selling expenses	463,000	114,000	198,000	151,000
Contribution margin	470,000	150,000	211,000	109,000
Fixed expenses:
Advertising, traceable	69,300	8,400	40,700	20,200
Depreciation of special equipment	43,600	20,400	7,500	15,700
Salaries of product-line managers	114,600	40,300	38,700	35,600
Allocated common fixed expenses*	186,600	52,800	81,800	52,000
Total fixed expenses	414,100	121,900	168,700	123,500
Net operating income (loss)	$ 55,900	$ 28,100	$ 42,300	$ (14,500)

*Allocated on the basis of sales dollars.

Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out.

Required:

1. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

2. Should the production and sale of racing bikes be discontinued?

3. Prepare a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.