Question

Jobs, Inc. has recently started the manufacture of Tri-Robo, a three-wheeled robot that can scan a home for fires and gas leaks and then transmit this information to a smartphone. The cost structure to manufacture 20,000 Tri-Robos is as follows

Direct Materials ($50 per robot) 1,000,000, Direct Labor ( $40 per hour) $800,000, Variable Overhead ($6 per robot) $120,000, Allocated Fixed overhead ($30 per robot) $600,000.

Jobs is approached by Tienh Inc., which offers to make Tri-Robo for $115 per unit, or $2,300,000.

A. Using incremental analysis, determine whether Jobs should accept this offer under each of the following assumptions. 1) Assume that $405,000 of the fixed overhead cost can be avoided. 2) Assume that none of the fixed overhead can be avoided. However if the robots are purchased from Tiehn, Jobs can use the released productive resources to generate additional income of $375,000.

B. Describe the qualitative factors that might affect the decision to purchase the robots from an outside supplier.

Answer 1

A-1)

Detail	make	but	income increase (decrease)
Direct material	$1000000	$0	$1000000
Direct labour	$800000	$0	$800000
Variable overhead	$120000	$0	$120000
Fixed overhead	$600000	$195000	$405000
Purchase price	$0	$2300000	($2300000)
Total annual cost	$2520000	$2495000	$25000

If the fixed overhead can be avoided than there will be a total $25000 increase in income if we buy. Therefore, the offer should be accepted.

A-2)

Detail	make	buy	income increase (decrease)
Direct labour	$1000000	$0	$1000000
Direct material	$800000	$0	$800000
Variable overhead	$120000	$0	$120000
Fixed overhead	$600000	$600000	$0
Opportunity cost	$375000	$0	$375000
Purchase price	$0	$2300000	($2300000)
Total annual cost	$2895000	$2900000	($5000)

There will be a net $5000 decrease in income. Hence, the offer should not be accepted.

B)

Since it is a buy from outside supplier, they are not sure about the quality of robots, employee morale, perception, ambience and safety which may affect the profitability when they sell them to the customers.

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