Question

Exercise 7-6 a1-a2 (Part Level Submission) (Video)q

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 19,500 Tri-Robos is as follows.

Cost

Direct materials ($48 per robot)$936,000

Direct labor ($39 per robot)760,500

Variable overhead ($6 per robot)117,000

Allocated fixed overhead ($31 per robot)604,500

    Total$2,418,000

Jobs is approached by Tienh Inc., which offers to make Tri-Robo for $113 per unit or $2,203,500.

Following are independent assumptions.

(a1)

Assume that $405,000 of the fixed overhead cost can be avoided. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

MakeBuyNet Income
Increase
(Decrease)

Direct materials$$$

Direct labor

Variable overhead

Fixed overhead

Purchase price

Total annual cost$$$

Using incremental analysis, determine whether Jobs should accept this offer.

The offer

should not be acceptedshould be accepted

.

Answer 1

Answer (a1).

	Make	Buy	Net Income Increase(Decrease)
Direct materials	$936,000	0	$936,000
Direct labor	760,500	0	760,500
Variable overhead	117,000	0	117,000
Allocated fixed overhead	604,500	199,500	405,000
Purchase price	0	2,203,500	(2,203,500)
Total annual cost	$2,418,000	$2,403,000	$15,000

The offer should be accepted.

Explanation:

Since the cost of buying is less than the cost of making the Tri-Robo, the offer to buy the product should be accepted.