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		$63.91
Direct labor		39.53
Overhead		126.50
Total		$229.94

Overhead costs include variable material handling costs of $6.50, 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 $220 per unit.

(a)

Prepare the incremental analysis for the decision to make or buy IMC2. (Round answers to 2 decimal places, e.g. 12.25. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Make IMC2 (per unit)		Buy IMC2 (per unit)		Net Income Increase (Decrease)
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?

YesNo

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Answer 1

As cost of buying is more than cost of making,thus innova should not purchase the component even if its capacity remains idle as it will decrease the net income by $38.06.