Innova uses 1,080 units of the component IMC2 every month to manufacture one of
ID: 2574415 • Letter: I
Question
Innova uses 1,080 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 $7.50, 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 $240 per unit.
(a)
Prepare the incremental analysis for the decision to make or buy IMC2.
Should Innova purchase the component from the outside vendor if Innova’s capacity remains idle?
Explanation / Answer
If Innova purchase the component from the outside vendor if Innova’s capacity remains idle there total loss will be 66.27*1080= $71571.60. So Answer is NO they should not buy and must continue manufacturing the component.
Make IMC 2 (Per Unit) Buy IMC 2 (per unit) Incremental Profit/(loss) Direct Material 58.62 0 58.62 Direct Labour 36.21 0 36.21 Material Handelling 7.50 0 7.50 Variable Over Head 71.40 0 71.40 Purchase Cost 0 240 (240) Total Unit Cost 173.73 240 (66.27)