Question

Jobs, Inc. has recently started the manufacture of Tri-Robo, a three-wheeled robot that can scan a home for fires and gas leaks and then transmit this information to a smartphone. The cost structure to manufacture 19,000 Tri-Robos is as follows. Cost Direct materials ($48 per robot) $912,000 Direct labor ($38 per robot) 722,000 Variable overhead ($5 per robot) 95,000 Allocated fixed overhead ($32 per robot) 608,000 Total $2,337,000 Jobs is approached by Tienh Inc., which offers to make Tri-Robo for $111 per unit or $2,109,000. Following are independent assumptions. 1) Assume that $405,000 of the fixed overhead cost can be avoided. Using incremental analysis, determine whether Jobs should accept this offer 2) Assume that none of the fixed overhead can be avoided. However, if the robots are purchased from Tienh Inc., Jobs can use the released productive resources to generate additional income of $375,000. 3) Based on the above assumptions, indicate whether the offer should be accepted or rejected?

Answer 1

Answer:

1) the offer should be accepted because its results in a financial advantage of $25,000

2) the offer should not be accepted because its results in a financial disadvantage of $5,000

3) depending on whether 1) or 2) is true, the offer should be accepted or rejected. If 1) applies, then the offer should be accepted. If 2) applies, then the offer should be rejected.

Explanation:

19,000 robots produced:

• Cost Direct materials ($48 per robot) $912,000
• Direct labor ($38 per robot) $722,000
• Variable overhead ($5 per robot) $95,000
• Allocated fixed overhead ($32 per robot) $608,000 ($405,000 are avoidable)
• Total $2,337,000

average total production cost per unit = $123

avoidable costs per unit = $112.3158

total avoidable costs if units are purchased from outside vendor = $2,134,000

total purchase costs from outside vendor = $2,109,000

financial advantage of purchasing robots = $25,000

if no allocated fixed costs are avoidable, but the facilities can generate $375,000 in additional income:

total avoidable production costs + additional income = $2,104,000

total purchase costs from outside vendor = $2,109,000

financial disadvantage of purchasing robots = $5,000