SY Telc has recently started the manufacture of RecRobo, a three-wheeled robot t
ID: 2434782 • 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) 500,000
2,020,000
SY Telc is approached by Chen Inc. which offers to make RecRobo for $90 per unit or $1,800,000.
Instructions:
a. Using incremental analysis, determine whether SY Telc should accept this offer under each of the following independent assumtions.
1. Assume that $300,000 of the fixed overhead cost can be reduced (avoided).
2. Assume that more of the fixed overhead 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 decisions to purchase the robots from an outside supplier.
Explanation / Answer
Case 1. Assume that $300,000 of the fixed overhead cost can be reduced (avoided). The revised cost sheet will be as follows: Direct materials ($40 per robot) $800,000 Direct labor ($30 per robot) 600,000 Variable overhead ($6 per robot) 120,000 Allocated fixed overhead 200,000 Total $1,720,000 Cost of purchase from Chen Inc. $1,800,000 Saving in production at our place $80,000 Hence, the robots should not be purchased from Chen Inc. Case 2. Assume that none of the fixed overhead can be reduced (avoided). However, if the robots are purchased from Chen Inc., SY Tele can use the released productive resources to generate additional income of $300,000. The revised cost sheet will be as follows: Direct materials ($40 per robot) $800,000 Direct labor ($30 per robot) 600,000 Variable overhead ($6 per robot) 120,000 Allocated fixed overhead 500,000 Total $2,020,000 Cost of purchase from Chen Inc. $1,800,000 Saving in purchase from Chen Inc. $ 220,000 Add: Additional income generated $300,000 Total saving to SY Tele $520,000 Hence, the robots should be purchased from Chen Inc.
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