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.
Trending nowThis is a popular solution!
Chapter 7 Solutions
Managerial Accounting: Tools for Business Decision Making 7e + WileyPLUS Registration Card
- Use the information provided to create a standard cost card for production of one glove box switch. To make one switch it takes 16 feet of plastic-coated copper wire and 0.5 pounds of plastic material. The plastic material can usually be purchased for $20.00 per pound, and the wire costs $2.50 per foot. The labor necessary to assemble a switch consists of two types. The first type of labor is assembly, which takes 3.5 hours. These workers are paid $27.00 per hour. The second type of labor is finishing, which takes 2 hours. These workers are paid $29.00 per hour. Overhead is applied using labor hours. The variable overhead rate is $14.90 per labor hour. The fixed overhead rate is $15.60 per hour.arrow_forwardCox Electric makes electronic components and has estimated the following for a new design of one of its products: Fixed Cost $10,000 Material cost per unit = $0.15 Labor cost per unit = $0.10 Revenue per unit = $0.65 Show Transcribed Text Implement your model from part (b) in Excel using the principles of good spreadsheet design and find the profit if Cox Electric makes 18,000 new product. If required, round your answer to nearest whole number. For subtractive or negative numbers use a minus sign. (Example: -300)arrow_forwardClone Computers assembles and packages personal computer systems from brand-name components. Its Home Office PC System is assembled from components costing $1400 per system and sells for $2000. Labour costs for assembly are $100 per system. This product line's share of overhead costs is $10,000 per month. a. How many Home Office systems must be sold each month to break even on this product line? b. What will be the profit or loss for a month in which 15 Home Office systems are sold?arrow_forward
- Woodruff Company is currently producing a snowmobile that uses five specialized parts. Engineering has proposed replacing these specialized parts with commodity parts, which will cost less and can be purchased in larger order quantities. Current activity capacity and demand (with specialized parts required) and expected activity demand (with only commodity parts required) are provided. Activities Activity Driver ActivityCapacity Current ActivityDemand Expected ActivityDemand Material usage Number of parts 200,000 200,000 200,000 Installing parts Direct labor hours 20,000 20,000 16,000 Purchasing parts Number of orders 7,600 6,498 3,990 Additionally, the following activity cost data are provided: Material usage: $11 per specialized part used; $27 per commodity part; no fixed activity cost. Installing parts: $21 per direct labor hour; no fixed activity cost. Purchasing parts: Four salaried clerks, each earning a $47,000 annual salary; each clerk is capable of processing 1,900…arrow_forwardThe first task: It was decided to establish a factory to produce building . units from sustainable materials. The construction of the factory required a fixed cost of 10 000 dollars. The variable cost is $5 per unit in the case of producing 5000 units. If the factory produces more than that, the :variable costs will be $4 per unit. Find the following with the fee a. The selling price if the contractor sells 4,000 units and gets a profit of $4,000. T. Break-even point in the event of an increase in fixed costs by 25% B_tie point. .of the current fixed cost. d. Profit (in case the fixed costs increase by 25% of the current fixed .cost) if the factory sells 5500 units.arrow_forwardM4 Engineering is considering an investment in one of two machines. The CNC machine will increase productivity from producing 150 airplane mounting clamps per hour to producing 290 per hour. The contribution margin per unit is $0.32 per clamp. Assume that any increased production of clamps can be sold. The second machine is an automatic packing machine. The packing machine will reduce packing labor cost. The labor cost saved is equivalent to $21 per hour. The CNC machine will cost $260,000, have an eight-year life, and will operate for 1,800 hours per year. The packing machine will cost $85,000, have an eight-year life, and will operate for 1,400 hours per year. M4 Engineering seeks a minimum rate of return of 15% on its investments. Calculate the NPV and PV index for both machines (the packing machine will have a higher PV index). Utilize the PV tables from chapter 11/ chapter 25 for your calculations. What machine should be purchased? Address both financial and non-financial reasons…arrow_forward
- A process control manager is considering two robots to improve materials-handling capacity in the production of rigid shaft couplings that make dissimilar drive components. Robot X has a first cost of $74,000, an annual M&O cost of $31,000, and $35,000 salvage value, and it will improve revenues by $96,000 per year. Robot Y has a first cost of $146,000, an annual M&O cost of $28,000, and $47,000 salvage value, and it will increase revenues by $120,000 per year. The company's MARR is 10% per year, and it uses a 3-year study period for economic evaluations. Calculate the incremental ROR, and identify the robot the manager should select. The incremental ROR is %. The manager should select robot (Click to select) ♥arrow_forwardUse the information provided to create a standard cost card for production of one glove box switch. To make one switch it takes 16 feet of plastic-coated copper wire and 0.5 pounds of plastic material. The plastic material can usually be purchased for $20.00 per pound, and the wire costs $2.50 per foot. The labor necessary to assemble a switch consists of two types. The first type of labor is assembly, which takes 3.5 hours. These workers are paid $27.00 per hour. The second type of labor is finishing, which takes 2 hours. These workers are paid $29.00 per hour. Overhead is applied using labor hours. The variable overhead rate is $14.90 per labor hour. The fixed overhead rate is $15.60 per hour. Round to the penny, two decimal places. Standard cost card Standard Quantity Standard Quantity Measurement Standard Cost per Unit Per Measurement Cost Summary Direct Materials Plastic-coated copper feet $ per foot $ Plastic material pounds $ per pound $ Direct…arrow_forwardUse the information provided to create a standard cost card for production of one glove box switch. To make one switch it takes 16 feet of plastic-coated copper wire and 0.5 pounds of plastic material. The plastic material can usually be purchased for $20.00 per pound, and the wire costs $2.50 per foot. The labor necessary to assemble a switch consists of two types. The first type of labor is assembly, which takes 3.5 hours. These workers are paid $27.00 per hour. The second type of labor is finishing, which takes 2 hours. These workers are paid $29.00 per hour. Overhead is applied using labor hours. The variable overhead rate is $14.90 per labor hour. The fixed overhead rate is $15.60 per hour. Round to the penny, two decimal places. Direct Materials Plastic-coated copper Plastic material Direct Labor Assembly Finish Manufacturing Overhead Variable overhead Fixed overhead Standard cost Standard Quantity Standard cost card Standard Quantity Standard Cost per Measurement Unit feet…arrow_forward
- Outdoor Luggage, Incorporated, makes high-end hard-sided luggage for sports equipment. Data concerning three of the company's most popular models appear below: Selling price per unit Variable cost per unit Ski Guard $ 230 $80 Golf Guard $ 320 $ 160 12 minutes 14 pounds Plastic injection molding machine processing time required to produce one unit Pounds of plastic pellets per unit Required: 1. If the total time available on the plastic injection molding machine is the constraint, how much contribution margin per minute of the constrained resource is earned by each product? 2. Which product offers the most profitable use of the plastic injection molding machine? 3. If a severe shortage of plastic pellets required the company to cut back production so much that its new constraint has become the total available pounds of plastic pellets, how much contribution margin per pound of the constrained resource is earned by each product? 4. Which product offers the most profitable use of the…arrow_forwardOutdoor Luggage, Incorporated, makes high-end hard-sided luggage for sports equipment. Data concerning three of the company's most popular models appear below: Selling price per unit Variable cost per unit Ski Guard $ 230 $ 80 Golf Guard $ 320 $ 160 12 minutes 14 pounds Plastic injection molding machine processing time required to produce one unit Pounds of plastic pellets per unit Required: 1. If the total time available on the plastic injection molding machine is the constraint, how much contribution margin per minute of the constrained resource is earned by each product? Fishing Guard $ 275 $ 140 8 minutes 15 pounds 5 minutes 13 poundsarrow_forwardEach year, Giada Company produces 20,000 units of a component part used in tablet computers. An outside supplier has offered to supply the part for $1.39. The unit cost is: Direct materials $0.83 Direct labor 0.34 Variable overhead 0.13 Fixed overhead 2.55 Total unit cost $3.85 1. What are the alternatives for Giada Company? a. Make the part in house b.Buy the part externally c.Make the part in house or buy the part externally d.None 2. Assume that none of the fixed cost is avoidable. List the relevant cost(s) of internal production. a.Direct materials, direct labor and variable and fixed overhead b.Direct materials, direct labor and variable overhead c.Direct materials, direct labor and fixed overhead d.None List the relevant cost(s) of external purchase. a.Purchase price b.Sales price c.Material price d.None 3. Which alternative is more cost effective and by how much? a. Making the part in house b. Buying the part from the external supplier by $___________ 4. What if…arrow_forward
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College