Answer:
Incremental Analysis is an analysis that considers the relevant costs of making a product or part vis-a-vis buying the product or part from outside.
The option to make a unit of IMC2 under incremental analysis will be:
Direct materials $62.58
Direct labour $39.79
Direct overhead:
- variable handling costs - $7.50
- 60% remainder ($126.50 - $7.50) = $71.40
Total variable cost = $181.27
This total variable cost of $181.27 per unit is then compared to the "buy" option that costs $210 per unit.
Therefore, the best option remains to make the unit in-house.
Explanation:
Incremental analysis is a decision technique that compares the differences options in order to make a choice. It is also called by these various terms: marginal analysis, relevant cost approach, and differential analysis.
It is important to note that regardless of the option chosen, 40% of the overhead after deducting the handling cost of $7.50 from $126.50 (equals to $47.60) is a sunk cost and will still be incurred.
In incremental analysis, sunk or past costs are not regarded for decision making because they will be incurred regardless of the option.
In this example, if Innova chooses to buy in the IMC2, its total unit cost will be $257.60 (210 + 47.60).
On the other hand, if it chooses to make the IMC2 in-house, the total unit cost will still remain $228.87 (62.58 + 39.79 + 126.50).
