Will thumbs up for correct answers!! ision Innova uses 1.000 units of the compon

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Will thumbs up for correct answers!!

ision Innova uses 1.000 units of the component IMC2 every month to manufacture one of its products. The unit costs incurred to manufacture the components are as follows: S65.00 45.00 126.50 236.50 Direct materials Direct labor Total 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 S200 per unit. Instructions (a) Should Innova purchase the component from the outside vendor if Innova's capacity remains idle? (b) Should Innova purchase the component from the outside vendor if it can use its facilities to manufacture another product? What information will Innova need to make an accurate decision? Show your calculations. (c) What are the qualitative factors that Innova will have to consider when making its decision? NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a"?"

Explanation / Answer

Solution a Calculation of manufacturing cost Particulars Amount Purchase price net effect Material 65.00 200.00 11.50 labour 45.00 handling 6.50 variable oh(126.5-6.5)*0.60 72.00 Total manufacturing cost 188.50 Gain on manufacturing Since, manufacturing cost is less than the purchase price, innove should manufacture IMC2. BY DOING SO, IT WILL GAIN (200-188.50) i.e. 11.50 per unit. For decision making, fixed cost is not considered as it is sunk cost. Solution b If Innova has the opportunity to manufacture another product , then it will purchase IMC2 from the vendor only if the gain from manufacturing another produst per unit is more than the loss on purchase of IMC2 from the vendor i.e. 11.50 per unit. Then only the innova should purchase IMC2 from the vendor. Solution c Quality of the product Material used by the vendor Timely supply of the IMC2 Transportation cost

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