Exercise 20-8 Innova uses 1,030 units of the component MC2 every month to manufa

ID: 2540716 • Letter: E

Question

Exercise 20-8 Innova uses 1,030 units of the component MC2 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows Direct materials 58.02 Direct labor Overhead Total 35.82 126.50 $220.34 overhead costs inclu de variable material handling costs 6. 66 wh ch are appled to ro ucts on the basis o rect material costs. The re an der of the overhead costs are applied on the basis of direct a or do a s nd cons sto % nable casts and 4 % h e costs. as oftarad to of $300 per ur Prepare the incremental analysis for the decision to make or buy IMC2. Net Income Increase (Decrease) Make IMC2 (per unit) Buy IMC2 (per unit) Direct material Direct labor Material handing Variable overhead Purchase price Total unt cost Should Innova purchase the component from the outside vendor if Innova's capecity remains idle?

Explanation / Answer

Answer:

Make IMC2
Per unit

Buy IMC
Per unit

Net Income
Increse/ (decrese)

Direct Material

58.02

Direct Labor

35.82

Material Handling

6.66

Variable Overhead

71.9

Purchase Price

300

-300

Total Unit Cost

174.5

292

-127.6

Working notes for the above answer is as under

Working note-1

The variable costs that are incurred per unit is

=(126.5 - 6.66)*60%

=71.90 per unit.

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The unit should not be purchased from the outside vendor, as the per unit cost would be $127.60 greater than if they made it