SY Telc has recently started the manufacture of RecRobo, a three wheeled robot t
ID: 2367850 • Letter: S
Question
SY Telc 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 20,000 RecRobo's is as follows:Cost
Direct materials ($40 per robot) $800,000
Direct labor ($30 per robot) 600,000
Variable overhead ($6 per robot) 120,000
Allocated fixed overhead ($25 per robot) 5,800,000
Total 2,020,000
Instructions:
a) Using incremental analysis, determine whether SY Telc should accept this offer under each of the following indepedent assumptions.
1. Assume that $300,000 of the fixed overhead cost can be reduced (avoided).
2. Assume that none of the fixed overhead can be reduced (avoided). However, if the robots are purchased from Chen Inc., SY Telc can use the released productive resources to generate additional income of $300,000.
b) Describe the qualitative factors that might affect the decision to purchase the robots from an outside supplier.
Explanation / Answer
Hi, Please find the answer as follows: Part A 1) Total Cost if Purchased and fixed cost of 300000 can be avoided = 1800000 (cost offered by the outside supplier)+ 200000 (500000 - 300000, fixed cost required to be incurred even after accepting the offer) = 2000000 which is less than the cost of producing internally. Incremental Gain = 2020000 - 2000000 = 20000. Offer should be accepted. 2) Total Cost if Purchased and fixed cost cannot be avoided = 1800000 (cost offered by the outside supplier) + 500000 (amount of fixed cost incurred even after accepting the offer) = 2300000 which is higher than the cost of producing internally. Incremental loss = 2300000 - 2020000 = 280000 Offer should be rejected. Part B Delivery time and quality of material supplied by Chen Inc may affect the decision to purchase robots from outside. Thanks, Aman
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