Question 2: Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company usuallyproduces all of the necessary parts for its engines, including all of the carburetors. An outside supplier hasoffered to produce and sell one type of carburetor to Troy Engines, Ltd., for a cost of $35 per carburetor.To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own costof producing this carburetor internally:Per 15,000 CarburetorsCarburetor per YearDirect materials (variable) $14 $210,000Direct labor (variable) 10 150,000Variable manufacturing overhead 3 45,000Fixed manufacturing overhead (FMOH), traceable 6* 90,000Fixed manufacturing overhead (FMOH), allocated 9** 135,000Fixed selling costs, allocated 2 30,000Total cost $44 $660,000* One-third of the traceable FMOH is supervisory salaries, a step cost. One supervisor is required forevery 15,000 carburetors. The one supervisor now employed can be laid off if product is outsourced.The remainder of the traceable FMOH represents depreciation of special equipment. This equipmenthas no resale value and will be retained even if the product is outsourced.** Allocated FMOH and selling costs are corporate-level costs. The outsourcing decision is not expectedto affect the total outflow on these accounts, over the decision’s horizon.Answer the following questions (Each of the following parts is independent of the other parts.)1.Assume that the company has no alternative use for the facilities that are now being used toproduce the carburetors. In the short-run, what is the effect on profit if the outside supplier’s offer isaccepted? Show all computations. 2. What is the maximum volume level at which Troy Engines, Ltd., should outsource thecarburetors (i.e., decide to buy)? 3. Suppose that if the carburetors were purchased, Troy Engines, Ltd., would decrease itsshort-run profits by $160,000 per month. However, the firm could use the freed-up capacity to launcha new product. On a per unit basis, this new product would sell for $15/unit but costs $14 per unit tomake. This cost of $14 per unit is made up of (i) the total inventoriable cost of $9 per unit whichincludes allocated fixed manufacturing costs of $3 per unit, and (ii) total selling costs of $5 per unitwhich includes fixed selling costs of $1 per unit. At what sales volume (for the new product) would itbe profitable for Troy Engines Ltd., to purchase rather than make the carburetors? Show allcomputations.

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1 ShortRun Profit Effect The shortrun effect on profit can be calculated by comparing the cost of pr... View the full answer