Troy Engines, Ltd., manufactures a variety of engines for use inheavy equipment. The company has always produced all of thenecessary parts for its engines, including all of the carburetors.An outside supplier has offered to sell one type of carburetor toTroy Engines, Ltd., for a cost of $39 per unit. To evaluate thisoffer, Troy Engines, Ltd., has gathered the following informationrelating to its own cost of producing the carburetorinternally:
| Per Unit | | 21,000 Units
Per Year | |
| Direct materials | $ | 18 | | $ | 378,000 | |
| Direct labor | | 11 | | | 231,000 | |
| Variable manufacturing overhead | | 3 | | | 63,000 | |
| Fixed manufacturing overhead, traceable | | 3 | * | | 63,000 | |
| Fixed manufacturing overhead, allocated | | 6 | | | 126,000 | |
| Total cost | $ | 41 | | $ | 861,000 | |
|
*One-third supervisory salaries; two-thirds depreciation ofspecial equipment (no resale value).
Required:
1. Assuming the company has no alternative use for thefacilities that are now being used to produce the carburetors, whatwould be the financial advantage (disadvantage) of buying 21,000carburetors 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. Thesegment margin of the new product would be $210,000 per year. Giventhis new assumption, what would be the financial advantage(disadvantage) of buying 21,000 carburetors from the outsidesupplier?
4. Given the new assumption in requirement 3, should the outsidesupplier’s offer be accepted?
