Answer:
Arigold Inc's Finials' Incremental Analysis:
a-i) To buy Finials, the price is $13.16 per unit.
a-ii) To make Finials, the relevant cost per unit is calculated as follows:
Materials = $3.98 per unit
Labor = $4.78 per unit
Variable Overhead = 62% of Labour cost, = 0.62 x $4.78 = $2,96
Therefore, total cost per unit is $(3.98 +4.78 + 2.96) = $11.72
b) Comparing the purchase cost of $13.16 and the make cost of $11.72 per unit, Arigold Inc should not buy the Finials.
Even when the fixed manufacturing overhead is charged to the Finials, the total unit cost (absorbed) will be $13,14, which is still less than the make cost of $13.16 per unit.
Explanation:
Incremental Analysis is a business technique that assists in making decisions among choices as it shows the true differences between alternatives. It is also known as the relevant cost approach, differential, and marginal analysis.
In the case of Arigold Inc, we disregarded the sunk or fixed manufacturing overhead of $43,100. This is cost is not relevant in this type of decision because it would still be incurred no matter the decision taken.
