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Make or Buy Decision LO11-3

Troy Engines, Ltd., 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, Ltd., for a cost of $35 per unit. To evaluate

this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing

the carburetor internally:

Per Unit 15,000 Units per Year

Direct materials .................................................................................. $14 $210,000

Direct labor ........................................................................................ 10 150,000

Variable manufacturing overhead ..............................................3 45,000

Fixed manufacturing overhead, traceable .............................6* 90,000

Fixed manufacturing overhead, allocated ...............................9 135,000

Total cost ............................................................................................ $42 $630,000

*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 15,000 carburetors from

the outside supplier?

2. Should the outside supplier's offer be accepted?

3. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to

launch a new product. The segment margin of the new product would be $150,000 per year. Given this

new assumption, what would be the financial advantage (disadvantage) of buying 15,000 carburetors

from the outside supplier?

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

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