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    Use Incremental Analysis for Make or Buy Decision (SY Telc)

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    SY Telc has recently started the manufacture of RecRobo, a three-wheeled robot that scans a home for fires and gas leaks and then transmits the information to a mobile phone. The cost structure to manufacture 20,000 RecRobo's is as follows. (see attachment)

    SY Telc is approached by Chen Inc, which offers to manufacture 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 independent assumptions.
    1. Assume that $300,000 of the fixed overhead cost can be reduced (avoided).
    2. Assume that none of the foxed 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.

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    Solution Summary

    The expert uses incremental analysis for make or buy decisions.