Question

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 40% fixed costs. A vendor has offered to supply the IMC2 component at a price of $200 per unit. What are the qualitative factors that Innova will have to consider when making this decision?

Answer 1

Incremental Analysis

	Make	Buy	Net Increase (Decrease)
Direct Material	$          65.00		$          65.00
Direct Labor	$          45.00		$          45.00
Material Handling	$            6.50		$            6.50
Variable Overhead	$          72.00		$          72.00
Purchase Price		$        200.00	$     (200.00)
Total Unit Cost	$        188.50	$        200.00	$        (11.50)

Variable Overhead = ($126.50-6.50) x 60%

Since per unit cost for making is lower than buying, company should not accept offer of vendor

Qualitative Factors to be considered
1. Quality of product
2. Time taken by vendor to complete the order
3. For how long vendor will be able to provide quality product at same price