E9-6
Use incremental analysis for make-or-buy decision.
E9-6 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
|
|
Total
|
$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 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.
PREVIEW [Excel Template]
EXERCISE
9-6
(a)
(1)
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Decision
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|||
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Net Income
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|||
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Make
|
Buy
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Increase(Decrease)
|
|
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Direct materials
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$800,000
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0
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$800,000
|
|
Direct labor
|
600,000
|
0
|
600,000
|
File name: E9-6-SY-Telc.xls File type: application/vnd.ms-excel
Price: $8
