SY Telc has recently started to manufacture 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 RecRobos is as follows:

		Cost
Direct materials ($38 per robot)		$760,000
Direct labour ($34 per robot)		680,000
Variable overhead ($6 per robot)		120,000
Allocated fixed overhead ($25 per robot)		500,000
Total		$2,060,000

SY Telc is approached by Chen Inc., which offers to make RecRobo for $78 per unit or $1,560,000. Using incremental analysis, determine whether SY Telc should accept this offer under each of the following independent assumptions: (1) Assume that $320,000 of the fixed overhead cost is avoidable. (If an amount reduces the net income then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).)

		Make		Buy		Net Income Increase (Decrease)
Direct materialsTotal annual costPurchase priceFixed overheadDirect labourVariable overhead		$		$		$
Variable overheadDirect labourFixed overheadDirect materialsTotal annual costPurchase price
Fixed overheadPurchase priceDirect labourDirect materialsTotal annual costVariable overhead
Variable overheadFixed overheadTotal annual costDirect labourPurchase priceDirect materials
Direct materialsFixed overheadVariable overheadDirect labourTotal annual costPurchase price
Total annual costDirect materialsPurchase priceDirect labourFixed overheadVariable overhead		$		$		$

Should the offer be accepted?

YesNo

(2) Assume that none of the fixed overhead is avoidable. However, if the robots are purchased from Chen Inc., SY Telc can use the released productive resources to generate additional income of $220,000. (If an amount reduces the net income then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).)

		Make		Buy		Net Income Increase (Decrease)
Opportunity costTotal annual costDirect labourDirect materialsPurchase priceVariable overheadFixed overhead		$		$		$
Variable overheadDirect labourDirect materialsPurchase priceFixed overheadTotal annual costOpportunity cost
Direct materialsVariable overheadOpportunity costTotal annual costFixed overheadDirect labourPurchase price
Fixed overheadVariable overheadDirect materialsDirect labourOpportunity costPurchase priceTotal annual cost
Purchase priceTotal annual costDirect materialsOpportunity costFixed overheadDirect labourVariable overhead
Total annual costVariable overheadPurchase priceOpportunity costFixed overheadDirect labourDirect materials
Fixed overheadVariable overheadDirect materialsOpportunity costDirect labourTotal annual costPurchase price		$		$		$

Should the offer be accepted?

Yes