Answer:
Troy Engines, Ltd.
a. The financial advantage of buying from the outside supplier = $34,000
b. The outside supplier's offer should be accepted.
c. The financial disadvantage of buying from the outside supplier = $136,000.
d. The outside supplier's offer should not be accepted.
Explanation:
a) Data and Calculations:
Cost of Internal External
Production Procurement
Per Unit 20,000 Units Per Year
Direct materials $17 $340,000
Direct labor 10 200,000
Variable manufacturing overhead 2 40,000 $36 $720,000
Fixed manufacturing overhead, traceable 9 180,000
Fixed manufacturing overhead, allocated 12 240,000 240,000
Total cost $50 604,000 $960,000
a) Buying 17,000 carburetors:
Cost of Internal External
Production Procurement
Variable manufacturing cost 29 493,000 $36 $612,000
Fixed manufacturing overhead, traceable 9 153,000
Fixed manufacturing overhead, allocated 12 240,000 240,000
Total cost $50 $886,000 $852,000
The financial advantage of buying from the outside supplier = $34,000 ($886,000 - $852,000)
b) The segment margin of the new product launched:
a) Buying 17,000 carburetors:
Cost of Internal External
Production Procurement
Variable manufacturing cost 29 493,000 $36 $612,000
Fixed manufacturing overhead, traceable 9 153,000
Fixed manufacturing overhead, allocated 12 240,000 240,000
Total cost $50 $886,000 $852,000
New segment product's margin (170,000)
Net total cost $716,000 $852,000
The financial disadvantage of buying from the outside supplier = $136,000 ($716,000 - $852,000).
