Innova uses 1,095 units of the component IMC2 every month to manufacture one of
ID: 2465647 • Letter: I
Question
Innova uses 1,095 units of the component IMC2 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows.
Overhead costs include variable material handling costs of $7.10, 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 $255.00 per unit.
(a)
Prepare the incremental analysis for the decision to make or buy IMC2. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
Should Innova purchase the component from the outside vendor if Innova’s capacity remains idle?
Explanation / Answer
Incremental analysis for the decision to make or buy IMC2
Make IMC2
Buy IMC2
Net Income Increase (Decrease)
A
B
A-B
Direct material
$ 63.00
$ -
$ 63.00
Direct labor
$ 37.00
$ -
$ 37.00
Material handling
$ 7.10
$ -
$ 7.10
Variable overhead
$ 71.64
$ -
$ 71.64
(126.50-7.1)*60%
Purchase price
$ -
$ 255.00
$ (255.00)
Total unit cost
$ 178.74
$ 255.00
$ (76.26)
If Innova’s capacity remains idle, it should not purchase the component from the outside vendor, because it shall decrease the net income.
Incremental analysis for the decision to make or buy IMC2
Make IMC2
Buy IMC2
Net Income Increase (Decrease)
A
B
A-B
Direct material
$ 63.00
$ -
$ 63.00
Direct labor
$ 37.00
$ -
$ 37.00
Material handling
$ 7.10
$ -
$ 7.10
Variable overhead
$ 71.64
$ -
$ 71.64
(126.50-7.1)*60%
Purchase price
$ -
$ 255.00
$ (255.00)
Total unit cost
$ 178.74
$ 255.00
$ (76.26)
If Innova’s capacity remains idle, it should not purchase the component from the outside vendor, because it shall decrease the net income.