Should the outside supplier’s offer be accepted? Given the new assumption in req
ID: 2531694 • Letter: S
Question
Should the outside supplier’s offer be accepted?
Given the new assumption in requirement 3, should the outside supplier’s offer be accepted?
Troy Engines, Ltd., 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, Ltd., for a cost of $34 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: 19,000 Units Per Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost Unit Per Year $ 16 $ 304,000 10 190,000 38,000 9* 171,000 12 228,000 $ 49 931,000 One-third supervisory salaries, two-thirds depreciation of special equipment (no resale value)Explanation / Answer
Answer 1
Cost of Procurement from Outside Supplier = 19,000 Units * 34 = 646,000
Thus there is financial disadvantage of $ 57,000 (646,000 - 589,000) of buying from outside supplier.
Answer 3
In Continuance of answer no. 1, if the additional capacity that is freed can be utilised for another product which will yield margin of $190,000, net gain / (loss) will be as follows:
Since there is net gain of $133,000 of buying from outside supplier, offer is to be accepted.
Cost for 19,000 units Direct Material 3,04,000 Direct Labour 1,90,000 Variable Mfg. Overhead 38,000 Traceable Fixed Cost(Excluding Depreciation) 57,000 Relevant Cost of Producing 5,89,000