E7-6 Jobs, Inc. has recently started the manufacture of Tri-Robo, a three-wheeled robot that can scan a home for fi res and gas leaks and then transmit this information to a mobile phone. The cost structure to manufacture 20,000 Tri-Robos is as follows. Cost Direct materials ($50 per robot) $1,000,000 Direct labor ($40 per robot) 800,000 Variable overhead ($6 per robot) 120,000 Allocated fi xed overhead ($30 per robot) 600,000 Total $2,520,000 Jobs is approached by Tienh Inc., which offers to make Tri-Robo for $115 per unit or $2,300,000. Instructions (a) Using incremental analysis, determine whether Jobs should accept this offer under each of the following independent assumptions. (1) Assume that $405,000 of the fi xed overhead cost can be reduced (avoided). (2) Assume that none of the fi xed overhead can be reduced (avoided). However, if the robots are purchased from Tienh Inc., Jobs can use the released productive resources to generate additional income of $405,000. (b) Describe the qualitative factors that might affect the decision to purchase the robots from an outside supplier
E7-6 Jobs, Inc. has recently started the manufacture of Tri-Robo, a three-wheeled robot
that can scan a home for fi res and gas leaks and then transmit this information to a mobile
phone. The cost structure to manufacture 20,000 Tri-Robos is as follows.
Cost
Direct materials ($50 per robot) $1,000,000
Direct labor ($40 per robot) 800,000
Variable
Allocated fi xed overhead ($30 per robot) 600,000
Total $2,520,000
Jobs is approached by Tienh Inc., which offers to make Tri-Robo for $115 per unit or $2,300,000.
Instructions
(a) Using incremental analysis, determine whether Jobs should accept this offer under
each of the following independent assumptions.
(1) Assume that $405,000 of the fi xed overhead cost can be reduced (avoided).
(2) Assume that none of the fi xed overhead can be reduced (avoided). However, if
the robots are purchased from Tienh Inc., Jobs can use the released productive
resources to generate additional income of $405,000.
(b) Describe the qualitative factors that might affect the decision to purchase the robots
from an outside supplier.
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