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 $35 per unit. To evaluate thisoffer, Troy Engines, Ltd., has gathered the following informationrelating to its own cost of producing the carburetor internally:Per Unit 20,000 Units Per Year Direct materials $ 17 $ 340,000Direct labor 11 220,000 Variable manufacturing overhead 3 60,000Fixed manufacturing overhead, traceable 3 * 60,000 Fixedmanufacturing overhead, allocated 6 120,000 Total cost $ 40 $800,000 *One-third supervisory salaries; two-thirds depreciation ofspecial equipment (no resale value). Required: 1. Assuming thecompany has no alternative use for the facilities that are nowbeing used to produce the carburetors, what would be the financialadvantage (disadvantage) of buying 20,000 carburetors from theoutside supplier? 2. Should the outside supplier’s offer beaccepted? 3. Suppose that if the carburetors were purchased, TroyEngines, Ltd., could use the freed capacity to launch a newproduct. The segment margin of the new product would be $200,000per year. Given this new assumption, what would be the financialadvantage (disadvantage) of buying 20,000 carburetors from theoutside supplier? 4. Given the new assumption in requirement 3,should the outside supplier’s offer be accepted?
