Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company usually...
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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: 15,000 Carburetors per Year Direct materials (variable) Direct labor (variable) Variable manufacturing overhead Fixed manufacturing overhead (FMOH), traceable Fixed manufacturing overhead (FMOH), allocated Fixed selling costs, allocated Total cost Per Carburetor $14 $210,000 10 150,000 3 45,000 6* 90,000 9** 135,000 2 30,000 $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.) 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. (4 points) What is the maximum volume level at which Troy Engines, Ltd., should outsource the carburetors (i.e., decide to buy)? (4 points) Suppose that if the carburetors were purchased, Troy Engines, Ltd., would decrease its short-run profits by $160,000 per month. However, the firm could use the freed up capacity to launch a new product. On a per unit basis, this new product would sell for $15/unit but costs $14 per unit to make and sell. This cost of $14 per unit is made up of (i) the total inventoriable cost of $9 per unit which includes allocated fixed manufacturing costs of $3 per unit, and (ii) total selling costs of $5 per unit which includes fixed selling costs of $1 per unit. At what sales volume (for the new product) would it be profitable for Troy Engines Ltd., to purchase rather than make the carburetors? Show all computations. 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: 15,000 Carburetors per Year Direct materials (variable) Direct labor (variable) Variable manufacturing overhead Fixed manufacturing overhead (FMOH), traceable Fixed manufacturing overhead (FMOH), allocated Fixed selling costs, allocated Total cost Per Carburetor $14 $210,000 10 150,000 3 45,000 6* 90,000 9** 135,000 2 30,000 $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.) 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. (4 points) What is the maximum volume level at which Troy Engines, Ltd., should outsource the carburetors (i.e., decide to buy)? (4 points) Suppose that if the carburetors were purchased, Troy Engines, Ltd., would decrease its short-run profits by $160,000 per month. However, the firm could use the freed up capacity to launch a new product. On a per unit basis, this new product would sell for $15/unit but costs $14 per unit to make and sell. This cost of $14 per unit is made up of (i) the total inventoriable cost of $9 per unit which includes allocated fixed manufacturing costs of $3 per unit, and (ii) total selling costs of $5 per unit which includes fixed selling costs of $1 per unit. At what sales volume (for the new product) would it be profitable for Troy Engines Ltd., to purchase rather than make the carburetors? Show all computations.
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Answer rating: 100% (QA)
1 To evaluate the effect on profit if the outside suppliers offer is accepted we need to compare the total cost of producing the carburetors internall... View the full answer
Related Book For
Managerial Accounting
ISBN: 978-1259307416
16th edition
Authors: Ray Garrison, Eric Noreen, Peter Brewer
Posted Date:
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