Question

*Grouper, 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 19,600 Tri-Robos is as follows.
Cost
Direct materials ($50 per robot) $980,000
Direct labor ($39 per robot) 764,400
Variable overhead ($7 per robot) 137,200
Allocated fixed overhead ($31 per robot) 600,000
Total $2,481,600
Grouper is approached by Tienh Inc., which offers to make Tri-Robo for $116 per unit or $2,273,600.

Make assumptions and decide whether the offer should be accepted or rejected.

Answer 1

Answer:

1) Using incremental analysis, accept this offer because it shall result in incremental Net Income of $13,000.

2) The offer should not be accepted because it shall result in incremental Net Loss of $17,000.

Explanation:

Assume that $405,000 of the fixed overhead cots can be avoided

                                  Make       Buy          Net Income                Income

                                                                                 Increase                   Increase

                                                                                (Decrease)            (Decrease)

Direct materials          $980,000 $0          $980,000             $0

Direct labor                  $764,400 $0           $764,400             $0

Variable overhead          $137,200 $0           $137,200              $0

Fixed overhead          $600,000 $195,000 $405,000     $405,000

Purchase price           $0          $2,273,600  ($2,273,600)      ($392,000)

Total annual cost             $2,481,600 $2,468,600 $13,000       $13,000

Using incremental analysis, accept this offer because it shall result in incremental Net Income of $13,000.

                                  Make       Buy          Net Income                Income

                                                                                 Increase                   Increase

                                                                                (Decrease)            (Decrease)

Direct materials           $980,000 $0         $980,000            $0

Direct labor                   $764,400 $0          $764,400           $0

Variable overhead  $137,200 $0         $137,200           $0

Fixed overhead         $600,000 $600,000 $0                    $0

Opportunity cost        $375,000 $0        $375,000    $375,000

Purchase price         $0          $2,273,600  ($2,273,600)  ($392,000)

Total annual cost  $2,856,600 $2,873,600     ($17,000)  ($17,000)

The offer should not be accepted because it shall result in incremental Net Loss of $17,000.