SY Telc has recently started to manufacture 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 RecRobos is as follows:
Cost
Direct materials ($35 per robot).............................$700,000
Direct labour ($30 per robot).................................600,000
Variable overhead ($10 per robot)...........................200,000
Allocated fixed overhead ($25 per robot)..................500,000
Total..........................................................$2,000,000
SY Telc is approached by Chen Inc., which offers to make RecRobo for $80 per unit or $1.6 million.
Instructions
(a) Using incremental analysis, determine whether SY Telc should accept this offer under each of the following independent assumptions:
1. Assume that $400,000 of the fixed overhead cost is avoidable.
2. Assume that none of the fixed overhead is avoidable. However, if the robots are purchased from Chen Inc., SY Telc can use the released productive resources to generate additional income of $200,000.
(b) Describe the qualitative factors that might affect the decision to buy the robots from an outside supplier.