(a) Using incremental analysis, determine whether SY Telc should accept this offer under each of the following independent assumptions.

Question

(1) Assume that $300,000 of the fixed overhead cost can be reduced (avoided).
(2) Assume that none of the fixed overhead can be reduced (avoided). However, if the robots are purchased from Chen Inc., SY Telc can use the released productive resources to generate additional income of $300,000.
(b) Describe the qualitative factors that might affect the decision to purchase the robots from an outside supplier.

Answer 1

Case 1: The robots should be purchased from Chen Inc., please see table below.

For 20000 Robots Cost structure
$ Unit Amount
Direct Material 40 $800,000
Direct Labor 30 $600,000
Variable Overhead 6 $120,000
Allocated Fixed Overhead 25 $500,000
Total $2,020,000

Offer Was 90 $1,800,000
Fixed Overhead (-300,000) $200,000
Total $2,000,000

Incremental Analysis
From Manufacture $2,020,000
From Offer $2,000,000
Incremental Profit $20,000

Case 2: The robots should be purchased from Chen Inc., please see table below.
For 20000 Robots Cost structure
$ Unit Amount
Direct Material 40 $800,000
Direct Labor 30 $600,000
Variable Overhead 6 $120,000
Allocated Fixed Overhead 25 $500,000
Total $2,020,000

Offer 90 $1,800,000
Fixed Overhead $500,000
Total $2,300,000

Incremental Analysis
Total Manufacturing Costs $2,020,000
From Offer $2,300,000
Additional Net Income $300,000
Incremental Profit $20,000