Selleck has recently started the manufacture of RecRobo, a three-wheeled robot that scan a home for fires and gas leaks and then transmit this information to a mobile phone. The cost structure to manufacture 19,970 RecRobo's is follows.
- Direct materials ($43 per robot) $858,710
- Direct Labor ($27 per robot) $539,190
- Variable overhead ($5 per robot) $99,850
- Allocated fixed overhead ($25 per robot) $499,250
- Total $1,997,000
Using incremental analysis, determine whether Selleck should accept this offer under each of the following independent assumptions.
1- Assume that $319,520 of the fixed overhead cost can be reduced (avoided).
Should the offer be accepted?
2- Assume that none of the fixed overhead can be reduced (avoided). However, if the robots are purchased from Padong Inc., Selleck can be the released productive resources to generate additional income of $319,520