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E7-8 Innova uses 1,000 units of the component IMC2

Price: $1.99


In nova 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.

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

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