SY Telc has recently started the manufacture of 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 RecRobo’s is as follows.
Direct materials ($40 per robot)$ 800,000
Direct labor ($30 per robot)600,000
Variable overhead ($6 per robot)120,000
Allocated fixed overhead ($25 per robot)500,000
SY Telc is approached by Chen Inc. which offers to make RecRobo for $90 per unit or $1,800,000. Instructions
1.(a)Using incremental analysis, determine whether SY Telc should accept this offer under each of the following independent assumptions.(1)Assume that $300,000 of the fixed overhead cost can be reduced (avoided). According to the give information, Total costs = $800,000 + $600,000 + $120,000 + $5,800,000 = $7,320,000 Total cost per unit = $7,320,000 / 20,000= $366
1.(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. If the Fixed overhead is reduced or avoided by $300,000 then the total cost per unit is calculated as
Total cost per unit = $7,020,000 / 20,000= $351
Therefore, the cost of manufacturing the three wheeled robo is $351 per unit. Here the Opportunity cost is $300,000. If the company decides to manufacture they will lose and additional income of $300,000. This lost income is an additional cost of continuing to make the robos in the make or buy decision. This opportunity cost is therefore added to the "Make" column for comparison. Now, calculating the total cost.
Total cost = Total cost + Opportunity cost
= $7,320,000 + $300,000= $7,620,000
Total cost per unit = $7,620,000 / 20,000= $381
Therefore, the cost per unit to manufacture the robos is exceeding. Therefore, it is suggested to make a buy decision.
(b)Describe the qualitative factors that might affect the decision to purchase the robots from an outside supplier. The qualitative factors includes the possible loss of jobs for employees who manufacture the three wheeled Robos. In addition, the management must access how well the supplier will be able to satisfy the company's quality control standards at the quoted price.
Twyla Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.
Current MachineNew Machine
Original purchase cost$15,000$25,000
Accumulated depreciation$ 6,000—
Estimated annual operating costs$24,000$18,000
Useful life5 years5 years
If sold now, the current machine would have a salvage value of $5,000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after five years. Instructions
Should the current machine be replaced?
Yes, The current machine should be replaced, because the maintaining expenses are high, when we compared with the new machine maintaining expenses.
Work sheet :
DetailsCurrent machineNew machine
Original purchase cost$15,000$25,000
Less: Accumulated Depreciation 6,000-
Depreciation = Cost of the machine - Salvage value/Estimated life period of the machine. current machine Depreciation = 9,000-5000/5=4,000/5=8009,000-5,000/5=4,000/5=800 New machine depreciation =25,000-0/5=25.000/5=5,000
Total Operating costs for Current machine =24.000+800=24,800 Total Operating costs for New machine =18,000+5,000=23,000 Hence, the operating costs for current machine are high, when we...