Exercise 20-8 Innova uses 1,010 units of the component IMC2 every month to manuf

Question

Exercise 20-8 Innova uses 1,010 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 Total $64.53 37.63 126.50 $228.66 Overhead costs include variable material handling costs of $6.57, 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. Prepare the incremental analysis for the decision to make or buy IMC2.

Explanation / Answer

Fixed cost will remain fixed in case of make and buy thatwhy not considered for decision making.

In variable cost 6.57 would be for material handling given in question and the remaining will be distributed for fixed (40%) and variable (60%)

so variable overhead = (126.50 - 6.57) *60%

= 119.93*60%

= 71.958

If innova capacity remains idle then it should make the component.

Please note all values are in $.

In case of further clarification required please comment.

Particulars Make IMC2 Buy IMC2 Net income increase/(decrease) Direct material 64.53 64.53 Direct Labor 37.63 37.63 Material handling 6.57 6.57 variable overhead 71.958 71.958 Purchase price 220 Total Unit cost 180.688 220 39.312

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