Liangquan Ltd. 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 20,000 Tri-Robos is as follows. 

                                                                                                    Cost

Direct materials (€50 per robot)                                     €1,000,000

Direct labor (€40 per robot)                                                800,000

Variable overhead (€6 per robot)                                      120,000

Allocated fi xed overhead (€30 per robot)                       600,000

                 Total                                                                  €2,520,000

Liangquan is approached by Tienh Ltd., which off ers to make Tri-Robo for €115 per unit or €2,300,000.

Instructions

a. Using incremental analysis, determine whether Liangquan should accept this off er under each of the following independent assumptions.

1. Assume that €405,000 of the fixed overhead cost can be avoided.

2. Assume that none of the fixed overhead can be avoided. However, if the robots are purchased from Tienh, Liangquan can use the released productive resources to generate additional income of €375,000.

b. Describe the qualitative factors that might affect the decision to purchase the robots from an outside supplier.