Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company usually produces all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered 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 cost of producing this carburetor internally:

Per 15,000 Carburetors

Carburetor per Year

Direct materials (variable) $14 $210,000

Direct labor (variable) 10 150,000

Variable manufacturing overhead 3 45,000

Fixed manufacturing overhead (FMOH), traceable 6* 90,000

Fixed manufacturing overhead (FMOH), allocated 9** 135,000

Fixed selling costs, allocated 2 30,000

Total cost $44 $660,000

* One-third of the traceable FMOH is supervisory salaries, a step cost. One supervisor is required for every 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 equipment has 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 expected to 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. (3 points) Assume that the company has no alternative use for the facilities that are now being used to produce the carburetors. In the short-run, what is the effect on profit if the outside supplier's offer is accepted? Show all computations.

1. (3 points) What is the maximum volume level at which Troy Engines, Ltd., should outsource the carburetors (i.e., decide to buy)?