SY Telc 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 20,000 RecRobo's is as follows.
Cost
Direct materials ($40 per robot) $800,000
Direct labor ($30 per robot) 600,000
Variable overhead ($6 per robot) 120,000
Allocated fixed overhead ($25 per robot) 500,000
Total $2,020,000
SY Telc is approached by Chen Inc. which offers to make RecRobo for $90 per unit or $1,800,000.
Using incremental analysis, determine whether SY Telc should accept this offer under each of the following independent assumptions. (If answer is zero, 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 $300,000 of the fixed overhead cost can be reduced (avoided).
Make Buy Net Income
Increase (Decrease)
Direct materials $ $ $
Direct labor
Variable Overhead
Fixed Overhead
Purchase Price
Total Annual Cost $ $ $
Should the offer be accepted?