Innova
uses 1,000 units of the component IMC2 every month to manufacture one of its
products. The unit costs incurred to manufacture the component are as follows
E7-8 Innova
uses 1,000 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
|
$65.00
|
|
Direct labor
|
45.00
|
|
Overhead
|
126.50
|
|
Total
|
$236.50
|
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 50% fixed costs. A vendor has offered to supply the IMC2 component at
a price of $200.00 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 this
decision?
TUTORIAL
PREVIEW
(a) Should
Innova purchase the component from the outside vendor if Innova’s capacity
remains idle?
|
Make
IMC2 |
Buy
IMC2 |
Net Income Increase
(Decrease) |
|
|
|
|||
|
Direct materials
|
$65.00
|
$0.00
|
$65.00
|
|
Direct labor
|
45.00
|
0.00
|
$45.00
|
|
Title
|
6.50
|
0.00
|
$6.50
|
File name: E7-8 Innova.xls File type: .xls PRICE: $5
