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 19,600 Tri-Robos is as follows. Cost $980,000 764,400 137,200 Allocated fixed overhead (31 per robot) 600,000 $2,481,600 Direct materials ($50 per robot) Direct labor ($39 per robot) Variable overhead ($7 per robot) Total Jobs is approached by Tienh Inc., which offers to make Tri-Robo for $116 per unit or $2,273,600 Following are independent assumptions.

Answer 1

Ans- Assume that $405,000 of the fixed overhead cots can be avoided:-

	Make	Buy	Net Income Increase (Decrease)	Income Increase (Decrease)
Direct materials	$980,000	$0	$980,000	$0
Direct labor	$764,400	$0	$764,400	$0
Variable overhead	$137,200	$0	$137,200	$0
Fixed overhead	$600,000	$195,000	$405,000	$405,000
Purchase price	$0	$2,273,600	($2,273,600)	($392,000)
Total annual cost	$2,481,600	$2,468,600	$13,000	$13,000

Using incremental analysis, Jobs should accept this offer because it shall result in incremental Net Income of $13,000.

	Make	Buy	Net Income Increase (Decrease)	Income Increase (Decrease)
Direct materials	$980,000	$0	$980,000	$0
Direct labor	$764,400	$0	$764,400	$0
Variable overhead	$137,200	$0	$137,200	$0
Fixed overhead	$600,000	$600,000	$0	$0
Opportunity cost	$375,000	$0	$375,000	$375,000
Purchase price	$0	$2,273,600	($2,273,600)	($392,000)
Total annual cost	$2,856,600	$2,873,600	($17,000)	($17,000)

The offer should not be accepted because it shall result in incremental Net Loss of $17,000.

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