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)


Variable overhead ($6 per robot)


Allocated fixed overhead ($25 per robot)




SY Telc is approached by Chen Inc. which offers to make RecRobo for $90 per unit or $1,800,000.


(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.