Jobs, Inc. has recently started the manufacture of Tri-Robo, a three-wheeled rob

Question

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 mobile phone. The cost structure to manufacture 19,940 Tri-Robos is as follows.

Cost Direct materials ($46 per robot) $917,240

Direct labor ($38 per robot) 757,720

Variable overhead ($7 per robot) 139,580

Allocated fixed overhead ($25 per robot) 498,500

Total $2,313,040

Jobs is approached by Tienh Inc., which offers to make Tri-Robo for $105 per unit or $2,093,700. Using incremental analysis, determine whether Jobs should accept this offer under each of the following independent assumptions. Assume that $299,100 of the fixed overhead cost can be reduced (avoided)

Assume that none of the fixed 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 $299,100.

Explanation / Answer

As the total cost of outsourcing is lower than manufacturing, Jobs Inc should opt for buy from Tienh Inc.

Make Buy $ $ Total variable manufacturing cost 1,814,540 Total purchase cost 2,093,700 Fixed cost Avoidable 299,100 Unavoidable 199,400 199,400 Additional income due to release of facilities (299,100) Total cost 2,313,040 1,994,000

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