Question

Selleck has recently started the manufacture of RecRobo, a three-wheeled robot that scan a home for fires and gas leaks and then transmit this information to a mobilephone. The cost structure to manufacture 19,970 RecRobo's is follows.

Direct materials ($43 per robot) $858,710
Direct Labor ($27 per robot) $539,190
Variable overhead ($5 per robot) $99,850
Allocated fixed overhead ($25 per robot) $499,250
Total $1,997,000

Using incremental analysis, determine whether Selleck should accept this offer under each of the following independent assumptions.

1- Assume that $319,520 of the fixed overhead cost can be reduced (avoided).
Should the offer be accepted?

2- Assume that none of the fixed overhead can be reduced (avoided). However, if the robots are purchased from Padong Inc., Selleck can be the released productiveresources to generate additional income of $319,520

Answer 1

Given information:Direct materials ($43 per robot) = $858,710
Direct Labor ($27 per robot) = 539,190
Variable overhead ($5 per robot)= 99,850
Allocated fixed overhead ($25 per robot) = 499,250
Total= 1,997,000
Number of units (Rec robo's) = 19,970unitsLet us calculate the net income to evaluate the proposal;To calculate ther net income, we have to know the revenue; for that let us assume that,Selling price = Fixed cost per unit + variable cost per unitVariable cost per unit ($43 + 27 + 5) = $75Fixed cost perunit=$25So sellingprice= $100.1. Assume that $319,520 of the fixed overhead cost can be reduced (avoided).
Revenue ($100 x 19,970 units) = $1,997,000Variable costs ($75 x 19,970) = 1,497,750Grossmargin= $499,250Fixedcost= 179,730Netincome= $319,520The offer should be accepted, as the net income is $319,520.

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2.Assume that none of the fixed overhead can be reduced (avoided).Revenue ($100 x 19,970 units) = $1,997,000Variablecosts= 000Grossmargin= 1,997,000Fixedcost= (499,250)Cost ofbuying=(858,710) (based on the additional income given in the problem)Netincome=$638,500