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 21,000 Tri-Robos is as follows: Cost Direct materials ($49 per robot) $1,029,000 Direct labor ($41 per robot) 861,000 Variable overhead ($5 per robot) 105,000 Allocated fixed overhead ($29 per robot) 600,000 Total $2,595,000 Jobs is approached by Tienh Inc., which offers to make Tri-Robo for $113 per unit or $2,373,000. Following are independent assumptions: Assume that $405,000 of the fixed overhead cost can be avoided. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Make Buy Net Income Increase (Decrease) Direct materials $ $ $ Direct labor Variable overhead Fixed overhead Purchase price Total annual cost $ $ $ Using incremental analysis, determine whether Jobs should accept this offer. The offer . LINK TO TEXT Assume that none of the fixed overhead can be avoided. However, if the robots are purchased from Tienh Inc., Jobs can use the released productive resources to generate additional income of $375,000. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Make Buy Net Income Increase (Decrease) Direct materials $ $ $ Direct labor Variable overhead Fixed overhead Opportunity cost Purchase price Totals $ $ $ Based on the above assumptions, indicate whether the offer should be accepted or rejected? The offer .

Answer 1

• All working forms part of the answer
• Requirement 1: If bought and Fixed Overhead avoided

	If Produced ($)	If Purchased ($)	Increase (Decrease in Income) ($)
Direct materials	1029000	0	1029000
Direct Labor	861000	0	861000
Variable overhead	105000	0	105000
Fixed Overhead	600000	195000	405000
Purchase price	0	2373000	-2373000
Total cost	$2595000	$2568000	$27000

Hence, if purchasing at $113 and fixed cost avoided by $405,000, the offer SHOULD BE ACCEPTED, as it generates additional income of $27,000

• Requirement 2: If bought, Fixed cost not avoided but generation of additional revenue

	If Produced $	If Purchased $	Increase (Decrease in Income) $
Direct materials	1029000	0	1029000
Direct Labor	861000	0	861000
Variable overhead	105000	0	105000
Fixed Overhead	600000	600000	0
Purchase price	0	2373000	-2373000
Additional Income		-375000	375000
Total cost	$2595000	$2598000	$-3000

Hence, if purchasing at $113 and fixed cost not avoided, but there’s additional revenue of $375000, the offer SHOULD ‘NOT’ BE ACCEPTED, as Net Income will decrease by $3,000