Selleck has recently started the manufacture of RecRobo, a three wheeled robot t

Question

Selleck has recently started the manufacture of RecRobo, a three wheeled robot that can scan ahome for fires and gas leaks and then transmit this information to a mobile phone. The cost structure to manufacture 20,100 RecRobo’s is as follows.
Direct materials ( $40 per robot) $804,000
Direct labor ($30 per robot) 603,000
Variable overhead ($4 per robot ) 80,400
Allocated fixed overhead ($25 per robot) 502,500
Total 1,989,900
Selleck is approached by Padong Inc. which offers to make RecRobo for $89 per unit or $1,788,900. Use incremental analysis determine whether Selleck should accept this offer under each of the following independent assumptions.
Assume that $321,600 of the fixed overhead cost can be reduced (avoided).

Make buy net income increase/decrease
Direct materials
Direct labor
Variable overhead
Fixed overhead
Purchase price
Total annual cost

Explanation / Answer

The should buy

Net Income

Increase or decrease

Make

Buy

Direct materials

$804,000

$ –0–

$804,000

Direct labor

603,000

–0–

603,000

Variable overhead

80,400

–0–

80,400

Fixed overhead

502,500

180,900

321,600

Purchase price

0

1,788,900

-1,788,900

Total annual cost

$1,989,900

$1,969,800

$20,100

The should buy

Net Income

Increase or decrease

Make

Buy

Direct materials

$804,000

$ –0–

$804,000

Direct labor

603,000

–0–

603,000

Variable overhead

80,400

–0–

80,400

Fixed overhead

502,500

180,900

321,600

Purchase price

0

1,788,900

-1,788,900

Total annual cost

$1,989,900

$1,969,800

$20,100

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