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Selleck has recently started the manufacture of RecRobo, a three wheeled robot that can scan ahome for fires and gas leaks and then transmit this information to a mobile phone. The cost structure to manufacture 20,100 RecRobo's is as follows.
- Direct materials ( $40 per robot) $804,000
- Direct labor ($30 per robot) 603,000
- Variable overhead ($4 per robot ) 80,400
- Allocated fixed overhead ($25 per robot) 502,500
- Total 1,989,900
Selleck is approached by Padong Inc. which offers to make RecRobo for $89 per unit or $1,788,900. Use incremental analysis determine whether Selleck should accept this offer under each of the following independent assumptions.
Assume that $321,600 of the fixed overhead cost can be reduced (avoided).
- Make buy net income increase/decrease
- Direct materials
- Direct labor
- Variable overhead
- Fixed overhead
- Purchase price
- Total annual cost