Innova uses 1,010 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 $62.58

Direct labor 39.79

Overhead 126.50

Total $228.87

Overhead costs include variable material handling costs of $7.21, 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 $210 per unit.

(a) Prepare the incremental analysis for the decision to make or buy IMC2.

Make IMC2 (per unit) - Buy IMC2 (per unit) - Net Income Increase (Decrease)

Direct material $ $ $

Direct labor

Material handling

Variable overhead

Purchase price

Total unit cost $ $ $

Should Innova purchase the component from the outside vendor if Innova’s capacity remains idle?

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