Excellent 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 Excellent Engines, Ltd., for a cost of Tk
35 per unit. To evaluate this offer, Excellent Engines, Ltd., has gathered the following information
relating to its own cost of producing the carburetor internally:
Per Unit 15,000 Units per Year
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tk 14 Tk 210,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 150,000
Variable manufacturing overhead . . . . . . . . . . . . . . . . . . 3 45,000
Fixed manufacturing overhead, traceable . . . . . . . . . . . . 6* 90,000
Fixed manufacturing overhead, allocated . . . . . . . . . . . . 9 135,000
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tk 42 Tk 630,000
*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).
Requirements:
1. Assuming that the company has no alternative use for the facilities that are now being used to
produce the carburetors, should the outside supplier’s offer be accepted? Show all computations.
2. Suppose that if the carburetors were purchased, Excellent Engines, Ltd., could use the freed capacity
to launch a new product. The segment margin of the new product would be Tk 150,000 per year.
Should Excellent Engines, Ltd., accept the offer to buy the carburetors for Tk 35 per unit? Show al
Excellent 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 Excellent Engines, Ltd., for a cost of Tk
35 per unit. To evaluate this offer, Excellent Engines, Ltd., has gathered the following information
relating to its own cost of producing the carburetor internally:
Per Unit 15,000 Units per Year
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tk 14 Tk 210,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 150,000
Variable manufacturing overhead . . . . . . . . . . . . . . . . . . 3 45,000
Fixed manufacturing overhead, traceable . . . . . . . . . . . . 6* 90,000
Fixed manufacturing overhead, allocated . . . . . . . . . . . . 9 135,000
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tk 42 Tk 630,000
*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).
Requirements:
1. Assuming that the company has no alternative use for the facilities that are now being used to
produce the carburetors, should the outside supplier’s offer be accepted? Show all computations.
2. Suppose that if the carburetors were purchased, Excellent Engines, Ltd., could use the freed capacity
to launch a new product. The segment margin of the new product would be Tk 150,000 per year.
Should Excellent Engines, Ltd., accept the offer to buy the carburetors for Tk 35 per unit? Show al
Related questions
| 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 $36 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: |
| Per Unit | 15,100 Units Per Year | |||
| Direct materials | $ | 9 | $ | 135,900 |
| Direct labor | 11 | 166,100 | ||
| Variable manufacturing overhead | 4 | 60,400 | ||
| Fixed manufacturing overhead, traceable | 9* | 135,900 | ||
| Fixed manufacturing overhead, allocated | 13 | 196,300 | ||
| Total cost | $ | 46 | $ | 694,600 |
| *40% supervisory salaries; 60% depreciation of special equipment (no resale value).
|
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:
| Per Unit | 21,000 Units Per Year | |||||
| Direct materials | $ | 14 | $ | 294,000 | ||
| Direct labor | 12 | 252,000 | ||||
| Variable manufacturing overhead | 2 | 42,000 | ||||
| Fixed manufacturing overhead, traceable | 9 | * | 189,000 | |||
| Fixed manufacturing overhead, allocated | 12 | 252,000 | ||||
| Total cost | $ | 49 | $ | 1,029,000 | ||
*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).
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 21,000 carburetors from the outside supplier?
2. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $210,000 per year. Given this new assumption, what would be financial advantage (disadvantage) of buying 21,000 carburetors from the outside supplier?
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