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 a home for fires and gas leaks and then transmit this information to a mobile phone. The cost structure to manufacture 19970 RecRobo's is as follows.

Direct Materials ($43 per robot) $858710
Direct Labor ($27 per robot) 539190
Variable overhead ($5 per robot) 99,850
Allocated fixed overhead ($25 per robot) 499,250
Total $1,997,000

Selleck is approached by Padong Inc. which offers to make RecRobo for $89 per unit of $1,777,330.
Using incremental analysis, determine whether Selleck should accept this offer under each of the following independent assumptions. (if answer is 0, please enter 0. Do not leave any fields blank. If amount decreases the income, use either a negative sign preceding the number eg -45 or parentheses eg (45).)

1- Assume that $319,520 of the fixed overhead cost can be reduced (avoided).

Item Make Buy Net Income (+/-)
Direct materials $858710 $0 $858710
Direct labor 539190 0 539190
Variable overhead 99850 0 99850
Fixed Overhead 499250 *** ***
Purchase Price 0 1777330 (1777330)

Total annual cost $19997000 *** ***

Should the offer be accepted? yes

2- Assume that none of the fixed overhead can be reduced (avoided). However, if the robots are purchased from Padong Inc., Selleck can use the released productive resources to generate additional income of $319520.

Item Make Buy Net Income (+/-)
Direct materials $858710 $0 $858710
Direct labor 539190 0 539190
Variable Overhead 99850 0 99850
Fixed Overhead 499250 *** ***
Opportunity Cost 319520 0 319520
Purchase Price 0 1777330 (1777330)
Totals 2316520 *** ***

Should the offer be accepted ? yes

NOTE: When seeing this in the problem *** this where I'm trying to put in the correct number. Otherwise the other set of numbers is correct.

Explanation / Answer

1- Assume that $319,520 of the fixed overhead cost can be reduced (avoided).

Item                             Make      Buy       Net Income (+/-)
Direct materials        $858,710      0             $858,710
Direct labor                $539,190       0              $539,190
Variable overhead        $99,850      0              $99,850
Fixed Overhead         $499,250  ($319,520)    $818,770
Purchase Price                      0 $1,777,330   (1,777,330)
Total annual cost   $1,997,000  $1,457,810     $539,190

Yes, the offer should be accepted as it would save fixed cost of $319,520 + avoidable cost $219,670 i.e. ($1,997,000 - $1,777,330) = $539,190 as total increment in income.

2.
Item                             Make      Buy       Net Income (+/-)
Direct materials        $858,710      0             $858,710
Direct labor                $539,190       0              $539,190
Variable overhead        $99,850      0              $99,850
Fixed Overhead         $499,250       0               $499,250
Opportunity cost        $319,520      0                $319,520          
Purchase Price                      0 $1,777,330 ($1,777,330)
Total annual cost $2,316,520  $1,777,330     $539,190

Yes, the offer should be accepted as it would generate additional income of $319,520 + avoidable cost $219,670 i.e. ($1,997,000 - $1,777,330) = $539,190 as total increment in income.

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