Innova uses 1,000 units of the component IMC2 every month to manufacture one of
ID: 2336281 • Letter: I
Question
Innova uses 1,000 units of the component IMC2 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows Direct materials Direct labor Overhead $61.48 37.19 126.50 $225.17 Total Overhead costs include variable material handling costs of $7.16, which are applied to products on the basis of direct material costs. The remainder of the overhead costs are applied on the basis of direct labor dollars and consist of 60% variable costs and 40% fixed costs. A vendor has offered to supply the IMC2 component at a price of $230 per unit. Prepare the incremalysis for the decision to make or buy IMC2 Net Income Increase (Decrease) Make IMC2 (per unit) Buy IMC2 (per unit) Direct material Direct labor Material handling Variable overhead Purchase price Total unit cost Should Innova purchase the component from the outside vendor if Innova's capacity remains idle?Explanation / Answer
a) Prepare incremental analysis :
No, Innova should not purchase the component from the outside vendor if innova's capacity remains idle
Make IMC2 (per unit) Buy IMC2 (per unit) Net income increase (decrease) Direct material 61.48 61.48 Direct labour 37.19 37.19 Material handling 7.16 7.16 Variable overhead (126.50-7.16)*60% = 71.60 71.60 Purchase price 230 -230 Total unit cost 177.43 230 -52.57