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 smartphone. The cost structure to manufacture 20,800 Tri-Robo's is as follows.

Cost
Direct materials ($50 per robot) $1,040,000
Direct labor ($40 per robot) 832,000
Variable overhead ($6 per robot) 124,800
Allocated fixed overhead ($29 per robot) 600,000
Total $2,596,800
Jobs is approached by Tienh Inc., which offers to make Tri-Robo for $115 per unit or $2,392,000. Following are independent assumptions
Assume that none of the fixed overhead can be avoided. However, if the robots are purchased from Tienh Inc., Jobs can use the released productive resources to generate additional income of $375,000. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
Make Buy Net Income
Increase
(Decrease)
Direct materials $ $ $
Direct labor
Variable overhead
Fixed overhead
Opportunity cost
Purchase price
Totals $ $ $
Based on the above assumptions, indicate whether the offer should be accepted or rejected?
The offer should be _____

Answer 1

After analyzing the costs, buying from Tienh Inc. would increase overall expenses, compared to the cost savings from making the product in-house, even after considering the opportunity to generate additional income. Therefore, the offer should be rejected.

Step-by-step explanation:

The student is asking whether Jobs, Inc. should accept the offer to have Tienh Inc. manufacture the Tri-Robo robots at $115 per unit compared to making them in-house. To determine if the offer should be accepted or rejected, we must analyze the incremental costs and benefits associated with the decision.

By using the information provided, we can fill out the 'Make or Buy' analysis table:

• Direct materials savings: $1,040,000
• Direct labor savings: $832,000
• Variable overhead savings: $124,800
• Fixed overhead: No savings ($600,000)
• Opportunity cost (income if buy): -$375,000
• Purchase price (if buy from Tienh): $2,392,000

The net incremental cost of buying is the total purchase price minus the sum of direct materials, direct labor, variable overhead costs saved, and the additional income from opportunity cost:

$2,392,000 - ($1,040,000 + $832,000 + $124,800 - $375,000)

This calculation shows that buying from Tienh Inc. would result in a net increase in costs, implying that the offer should be rejected and Tri-Robo should continue to be made in-house.

Answer 2

case 1: when $405,000 fixed overhead cost can be avoided

make buy net income

direct material

994700 0 994700

direct labor 832300 0 832300

variable overhead 101500 0 101500

fixed overhead 600000 195000 405000

purchase price 0 2314200 (2314200)

total 2528500 2509200 19300

YES,jobs should accept the offer because it results in saving of $19300

CASE 2: when no fixed overhead can be avoided

make buy net income

direct material 994700 0 994700

direct labour 832300 0 832300

variable overhead 101500 0 101500

fixed overhead 600000 600000 0

opportunity cost 375000 0 375000

purchase price 0 2314200 (2314200)

total cost 2903500 2914200 (10700)

NO, jobs shold not accept the offer because it results in loss of $10700