Question

please answer pasrts a, b, c, and 1

.! Xi 4 А в с о 1 E7.8 Prepare incremental analysis concerning make-or-buy decision 2 Innova uses 1.000 units of the component IMC2 every month to manufacture one of its products. The unit costs incurred to 3 manufacture the components are as follows: Direct materials Direct labor Overhead Total $65.00 45.00 126.50 236.50 10 Overhead costs include variable material handling costs of $6.50, which are applied to products on the basis of direct material 11 costs. The remainder of the overhead costs are applied on the basis of direct labor dollars and consist of 60% variable costs and 12 40% fixed costs. A vendor has offered to supply the IMC2 component at a price of $200 per unit. 14 Instructions 15 ) Should Innova purchase the component from the outside vendor if Innova's capacity remains idlo? 16(b) Should Innova purchase the component from the outside vendor if it can use its facilities to manufacture 17 another product? What information will Innova need to make an accurate decision? Show your calculations. 10(0) What are the qualitative factors that Innova will have to consider when making its decision? 19 NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?". 23(a) Should Innova purchase the component from the outside vendor if Innova's capacity remains idle? Net income Make IMC2 Buy IMC2 Increase (Decrease) Direct materials Value Value Value Direct labor Value Value Value Material handling Value Value Variable overhead costs Value Value Value 575 87.6 17.10 7.11 7.15 Value

Answer 1

(a) should Innova purchase the component from outside vendor if Innova's capacity remain idle?

	Make IMC2	Buy IMC2	Net increase (decrease)
Direct Material	65	nil	(65)
Direct Labor	45	nil	(45)
Material Handling	6.5	nil	(6.5)
Variable Overhead Cost	72	nil	(72)
Purchase price	nil	200	200
Total unit cost	188.5	200	11.5

Response:

since making IMC2 is resulting in net income of $11.5, it is better to make the component. Fixed overhead cost of $48 is not relevant for decision making since anyway it will incur.

(b) should Innova purchase component from outside vendor if its facility can be used for manufacture another product?

Information about contribution per unit of new product produced using the idle capacity is needed.

Here Innova uses 1000 units of IMC2 per month for the production. If buying IMC2 from outside vendor Innova will loose income of $11500 (1000*11.5) per month.

So that new product that is produced with the idle capacity must be capable of generating contribution of more than $11500

(c) Qualitative factors needs to be considered for taking make or buy decision

• Quality of IMC2 component buying from outside vendors
• Delivery schedules or stock out risk of components
• Risk of procuring labor force in future
• Trustworthiness of Vendor
• tolerance limit of damage and shortage of component

Answer to the question number 1

If material price changes to 68 and overhead changes to 130 per component

then total variable cost of production of IMC2 will increase by $5.1 {[(130-6.5)*60%]-72} +(68-65)

then contribution lost per component will be $6.4 (11.5-5.1)

per month contribution lost will be 6.4* 1000 = $6400

So that if manufacturing of additional product will ensure contribution pf at least $ 6400, IMC2 can be bought from vendor. for taking a better decision above qualitative factors also to be considered.