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 20,400 Tri-Robos is as follows.

		Cost
Direct materials ($51 per robot)		$1,040,400
Direct labor ($39 per robot)		795,600
Variable overhead ($7 per robot)		142,800
Allocated fixed overhead ($29 per robot)		600,000
Total		$2,578,800

Jobs is approached by Tienh Inc., which offers to make Tri-Robo for $116 per unit or $2,366,400.

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		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount
Direct labor		enter a dollar amount		enter a dollar amount		enter a dollar amount
Variable overhead		enter a dollar amount		enter a dollar amount		enter a dollar amount
Fixed overhead		enter a dollar amount		enter a dollar amount		enter a dollar amount
Purchase price		enter a dollar amount		enter a dollar amount		enter a dollar amount
Total annual cost		$enter a total amount for this column		$enter a total amount for this column		$enter a total amount for this column

Using incremental analysis, determine whether Jobs should accept this offer.

The offer select an option                                                                      should be acceptedshould not be accepted.

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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		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount
Direct labor		enter a dollar amount		enter a dollar amount		enter a dollar amount
Variable overhead		enter a dollar amount		enter a dollar amount		enter a dollar amount
Fixed overhead		enter a dollar amount		enter a dollar amount		enter a dollar amount
Opportunity cost		enter a dollar amount		enter a dollar amount		enter a dollar amount
Purchase price		enter a dollar amount		enter a dollar amount		enter a dollar amount
Totals		$enter a total amount for this column		$enter a total amount for this column		$enter a total amount for this column

Based on the above assumptions, indicate whether the offer should be accepted or rejected?

The offer select an option                                                                      should be acceptedshould not be accepted.

Answer 1

	Make	Buy	Net Income Increase (Decrease)
Direct materials	$1,040,400	-	$1,040,400
Direct labor	$795,600	-	$795,600
Variable overhead	$142,800	-	$142,800
Fixed overhead	$600,000	$195,000	$405,000
Purchase price		$2,366,400	($2,366,400)
Total annual cost	$2,578,800	$2,561,400	$17,400

Jon inc. should accept this offer. Because Job inc. will incure $17,400 morethan if making the robots. Company should buy from Tienh inc.

	Make	Buy	Net Income Increase (Decrease)
Direct materials	$1,040,400	-	$1,040,400
Direct labor	$795,600	-	$795,600
Variable overhead	$142,800	-	$142,800
Fixed overhead	$600,000	-	$600,000
Opportunity cost	$375,000	-	$375,000
Purchase price		$2,366,400	($2,366,400)
Total annual cost	$2,953,800	$2,366,400	$587,400

Jon inc. should accept this offer. Because Job inc. will incure $587,400 morethan if making the robots. Company should buy from Tienh inc.