### Cost Analysis for Manufacturing Decision: Make or BuyInnova produces 1,100 units of the component IMC2 monthly. The manufacturing costs per unit are as follows:- **Direct materials**: $55.34- **Direct labor**: $39.31- **Overhead**: $126.50- **Total cost per unit**: $221.15**Details of Overhead Costs:**- **Variable material handling costs**: $6.50 (allocated based on direct material costs)- Remaining overhead is allocated based on direct labor, consisting of 60% variable costs and 40% fixed costs.A vendor proposes to supply the IMC2 component at $290.00 per unit.### Incremental Analysis for Make or Buy DecisionThis analysis assumes no fixed costs will be eliminated if production is outsourced.#### Cost Comparison Table:| Cost Component | Make IMC2 (per unit) | Buy IMC2 (per unit) | Net Income Increase (Decrease) ||----------------------|----------------------|---------------------|-------------------------------|| Direct material | $55.34 | | $55.34 || Direct labor | $39.31 | | $39.31 || Material handling | $6.50 | | $6.50 || Variable overhead | $72.00 | | $72.00 || Fixed overhead | | | || **Purchase price** | | $290.00 | || **Total unit cost** | **$173.15** | **$290.00** | **($116.85)** |***Decision Point:***Should Innova purchase the component from the outside vendor if Innova’s unused facilities remain idle? **Answer: No.**The analysis shows a $116.85 decrease in net income per unit if the component is bought instead of made in-house.

solution a: For incremental analysis for make or buy IMC 2, we should compare relevant cost to make…

Innova uses 1,100 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 $55.34 39.31 126.50 $221.15 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 60.00% variable costs and 40.00% fixed costs. A vendor has offered to supply the IMC2 component at a price of $290.00 per unit.

Innova uses 1,100 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 $55.34 39.31 126.50 $221.15 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 60.00% variable costs and 40.00% fixed costs. A vendor has offered to supply the IMC2 component at a price of $290.00 per unit.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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