Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Troy Engines, Ltd . , manufactures a variety of engines for use in heavy equipment. The company usually produces all of the necessary parts for

Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company usually produces all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to produce and sell one type of carburetor to Troy Engines, Ltd., for a cost of $35 per carburetor. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing this carburetor internally:
Per 15,000 Carburetors
Carburetor per Year
Direct materials (variable) $14 $210,000
Direct labor (variable)10150,000
Variable manufacturing overhead 345,000
Fixed manufacturing overhead (FMOH), traceable 6*90,000
Fixed manufacturing overhead (FMOH), allocated 9**135,000
Fixed selling costs, allocated 230,000
Total cost $44 $660,000
* One-third of the traceable FMOH is supervisory salaries, a step cost. One supervisor is required for every 15,000 carburetors. The one supervisor now employed can be laid off if product is outsourced. The remainder of the traceable FMOH represents depreciation of special equipment. This equipment has no resale value and will be retained even if the product is outsourced.
** Allocated FMOH and selling costs are corporate-level costs. The outsourcing decision is not expected to affect the total outflow on these accounts, over the decisions horizon.
Answer the following questions (Each of the following parts is independent of the other parts.)
1. Assume that the company has no alternative use for the facilities that are now being used to produce the carburetors. In the short-run, what is the effect on profit if the outside suppliers offer is accepted? Show all computations.
2. What is the maximum volume level at which Troy Engines, Ltd., should outsource the carburetors (i.e., decide to buy)?
3. Suppose that if the carburetors were purchased, Troy Engines, Ltd., would decrease its short-run profits by $160,000 per month. However, the firm could use the freed-up capacity to launch a new product. On a per unit basis, this new product would sell for $15/unit but costs $14 per unit to make. This cost of $14 per unit is made up of (i) the total inventoriable cost of $9 per unit which includes allocated fixed manufacturing costs of $3 per unit, and (ii) total selling costs of $5 per unit which includes fixed selling costs of $1 per unit. At what sales volume (for the new product) would it be profitable for Troy Engines Ltd., to purchase rather than make the carburetors? Show all computations.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting Tools For Business Decision Making

Authors: Donald E. Kieso, Paul D. Kimmel, Jerry J. Weygandt

8th Edition

1119316022, 978-1119316022

More Books

Students also viewed these Accounting questions