E7.21
Prepare an incremental analysis for the make-or-buy decision.
(LO 3) SY Telc has recently started to manufacture 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 RecRobos is as follows:
Cost
Direct materials ($35 per robot)
$ 700,000
Direct labour ($30 per robot)
600,000
Variable overhead ($10 per robot)
200,000
Allocated fixed overhead ($25 per robot)
500,000
Total
$2,000,000
26
SY Telc is approached by Chen Inc., which offers to make RecRobo
for $80 per unit or $1.6 million.
Instructions
a)
Using incremental analysis, determine whether SY Telc should accept
this offer under each of the following independent
assumptions:
• 1.Assume that $400,000 of the fixed overhead cost is
avoidable.
• 2.Assume that none of the fixed overhead is avoidable. However,
if the robots are purchased from Chen Inc., SY Telc can use the
released productive resources to generate additional income of
$200,000.
b)
Describe the qualitative factors that might affect the decision to
buy the robots from an outside supplier.