Selleck has recently started the manufacture of RecRobo, a three-wheeled robot t

Question

Selleck has recently started the manufacture of RecRobo, a three-wheeled robot that scan a home for fires and gas leaks and then transmit this information to a mobile phone. The cost structure to manufacture 19,970 RecRobo's is follows.

Direct materials ($43 per robot) $858,710
Direct Labor ($27 per robot) $539,190
Variable overhead ($5 per robot) $99,850
Allocated fixed overhead ($25 per robot) $499,250
Total $1,997,000

Using incremental analysis, determine whether Selleck should accept this offer under each of the following independent assumptions.

1- Assume that $319,520 of the fixed overhead cost can be reduced (avoided).
Should the offer be accepted?

2- Assume that none of the fixed overhead can be reduced (avoided). However, if the robots are purchased from Padong Inc., Selleck can be the released productive resources to generate additional income of $319,520

Explanation / Answer

Given information: Direct materials ($43 per robot)              = $858,710
Direct Labor ($27 per robot)                  = 539,190
Variable overhead ($5 per robot)            = 99,850
Allocated fixed overhead ($25 per robot) = 499,250
Total                                                        = 1,997,000
Number of units (Rec robo's)                    = 19,970 units Let us calculate the net income to evaluate the proposal; To calculate ther net income, we have to know the revenue; for that let us assume that, Selling price = Fixed cost per unit + variable cost per unit Variable cost per unit ($43 + 27 + 5) = $75 Fixed cost per unit                              = $25 So selling price                                   = $100. 1. Assume that $319,520 of the fixed overhead cost can be reduced (avoided).
Revenue ($100 x 19,970 units) = $1,997,000 Variable costs ($75 x 19,970) = 1,497,750 Gross margin                            = $499,250 Fixed cost                                = 179,730 Net income                               = $319,520 The offer should be accepted, as the net income is $319,520. Fixed cost                                = 179,730 Net income                               = $319,520 The offer should be accepted, as the net income is $319,520. 2.Assume that none of the fixed overhead can be reduced (avoided).    Revenue ($100 x 19,970 units) = $1,997,000 Variable costs                           = 000 Gross margin                             = 1,997,000 Fixed cost                                 = (499,250) Cost of buying                           = (858,710) (based on the additional income given in the problem) Net income                                = $638,500 Net income                                = $638,500

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