AE7-6 (a) Selleck has recently started the manufacture of RecRobo, a three-wheel

Question

AE7-6 (a)
Selleck has recently started the manufacture of RecRobo, a three-wheeled robot that can scan a home for fires and gas leaks and then transmit this information to a mobile phone. The cost structure to manufacture 20,030 RecRobo's is as follows.

      

                           Cost
   Direct materials ($39 per robot)       $781,170
   Direct labor ($26 per robot)           520,780
   Variable overhead ($7 per robot)       140,210
   Allocated fixed overhead ($25 per robot)   500,750
   Total                       $1,942,910

Selleck is approached by Padong Inc. which offers to make RecRobo for $86 per unit or $1,722,580.

Using incremental analysis, determine whether Selleck should accept this offer under each of the following independent assumptions. (If answer is zero, please enter 0. Do not leave any fields blank. If amount decreases the income, use either a negative sign preceding the number eg -45 or parentheses eg (45).)

(1) Assume that $320,480 of the fixed overhead cost can be reduced (avoided).

  

           Make           Buy       Net Income
                               Increase (Decrease)
Direct materials       $           $       $
Direct labor          
Variable Overhead          
Fixed Overhead          
Purchase Price  

Total Annual Cost   $           $       $

Should the offer be accepted?
Yes or No

(2) Assume that none of the fixed overhead can be reduced (avoided). However, if the robots are purchased from Padong Inc., Selleck can use the released productive resources to generate additional income of $320,480.

           Make           Buy       Net Income
                               Increase (Decrease)
Direct materials       $           $       $
Direct labor          
Variable Overhead          
Fixed Overhead          
Opportunity Cost
Purchase Price  

Totals           $           $       $

Should the offer be accepted?
Yes or No?

Explanation / Answer

Net Income Increase Make Buy (Decrease) Direct materials $781,170 $ –0– $781,170 Direct labor 520,780 –0– 520,780 Variable overhead 140,210 –0– 140,210 Fixed overhead 500,750 180,270 320,480 Purchase price 0 1,722,580 -1,722,580 Total annual cost $1,942,910 $1,902,850 $40,060 Yes. The offer should be accepted as net income will increase by $40,060 Net Income Increase Make Buy (Decrease) Direct materials $781,170 $0 $781,170 Direct labor 520,780 0 520,780 Variable overhead 140,210 0 140,210 Fixed overhead 500,750 500,750 0 Opportunity cost 320,480 0 320,480 Purchase price 0 1,722,850 -1,722,580 Totals $2,263,390 $2,223,600 $40,060 Yes. The offer should be accepted as net income would be $40,060 more Net Income Increase Make Buy (Decrease) Direct materials $781,170 $ –0– $781,170 Direct labor 520,780 –0– 520,780 Variable overhead 140,210 –0– 140,210 Fixed overhead 500,750 180,270 320,480 Purchase price 0 1,722,580 -1,722,580 Total annual cost $1,942,910 $1,902,850 $40,060 Yes. The offer should be accepted as net income will increase by $40,060 Net Income Increase Make Buy (Decrease) Direct materials $781,170 $0 $781,170 Direct labor 520,780 0 520,780 Variable overhead 140,210 0 140,210 Fixed overhead 500,750 500,750 0 Opportunity cost 320,480 0 320,480 Purchase price 0 1,722,850 -1,722,580 Totals $2,263,390 $2,223,600 $40,060

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