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March 27, 2017

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(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).
(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.

  • Accounting - ,

    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

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