Exercise 20-8 Innova uses 1,056 units of the component IMC2 every month to manuf

Question

Exercise 20-8

Innova uses 1,056 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 $6.70, 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 $245.00 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).)

Direct materials $ 58.00 Direct labor 39.00 Overhead 126.50 Total $223.50

Explanation / Answer

a.

Total fixed overheads= (126.5-6.7)*.4*1056= $50603.52

relevant cost for decision making:

Direct material $58

Direct labour $39

variable mat handling $6.70

other Variable oh $71.88

Total per unit cost $175.58

Incremental analysis:

increase/(decrease)

in income

As the income will increase by $69.42 per unit Innova should make the IMC2

now, if Innova's capacity remains idle then innova should purchase the component.

Particular make buy

increase/(decrease)

in income

direct material 58 0 (58) direct labour 39 0 (39) material handling 6.7 0 (6.7) variable oh 71.88 0 (71.88) purchase price 0 245 245 Total unit cost 175.58 245 69.42

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