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

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.

Step-by-step 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.