Reference no: EM132437284
Question - Becky's 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 Becky Engines, Ltd., for a cost of $35 per unit. To evaluate this offer, Becky Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:
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Per Unit
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22,000 Units Per Year
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Direct materials
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$15
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$330,000
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|
Direct labor
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8
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176,000
|
|
Variable manufacturing overhead
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3
|
66,000
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|
Fixed manufacturing overhead, traceable
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3*
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66,000
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Fixed manufacturing overhead, allocated
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6
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132,000
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Total cost
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$35
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$770,000
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*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 22,000 carburetors from the outside supplier?
2. Suppose that if the carburetors were purchased, Becky Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $220,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 22,000 carburetors from the outside supplier?