Chapter 7, Problem 7.6E

Use incremental analysis for make-or-buy decision.

(LO 3), E

Jobs. 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 smart-phone. 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 fixed overhead ($30 per robot)	600,000
Total	$2,520,000

Jobs is approached by Tienh Inc., which offers to make Tri-Robo for $115 per unit or $2,300,000.

Instructions

(a) Using incremental analysis, determine whether Jobs should accept this offer 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 Inc., Jobs 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.