Exercise 13-3 (Algo) Make or Buy Decision (LO13-3) Troy Engines, Limited, 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, Limited, for a cost of $40 per unit. To evaluate this offer, Troy Engines, Limited, has gathered the following information relating to its own cost of producing the carburetor internally: 15,000 Units Per Year Direct materials $ 225,000 Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable 135,000 Fixed manufacturing overhead, allocated 180,000 Total cost $ 735,000 "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, Limited, 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? Per Unit $ 15 12 2 9 12 $ 49 165,000 30,000 Exercise 13-7 (Algo) Sell or Process Further Decisions [LO13-7) B c Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $355,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unlt selling prices and total output at the split-off point are as follows: Product Selling Price Quarterly Output A $ 21.00 per pound 13,200 pounds $ 15.00 per pound 20,600 pounds $ 27.00 per gallon 4,400 gallons Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unlt selling prices after further processing are given below: Additional Processing Product Costa Selling Price A $ 73, 440 $ 26.20 per pound B $ 105,620 $ 21.20 per pound c $ 46,000 $ 35.20 per gallon Required: 1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point? 2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further
