Make-or-Buy Decision
Zion Manufacturing had always made its components in-house.However, Bryce Component Works had recently offered to supply onecomponent, K2, at a price of $25 each. Zion uses 13,000 units ofComponent K2 each year. The cost per unit of this component is asfollows:
Direct materials
$12.00
Direct labor
8.25
Variable overhead
4.50
Fixed overhead
2.00
Total
$26.75
Assume that 75% of Zion Manufacturing’s fixed overhead forComponent K2 would be eliminated if that component were no longerproduced.
Required:
1. Conceptual Connection: If Zion decides topurchase the component from Bryce, by how much will operatingincome increase or decrease?Decrease $
Which alternative is better?Make the component in house
2. Conceptual Connection: By how much would theper unit relevant fixed cost have to decrease before Zion would beindifferent (i.e., incur the same cost) between “making” versus”purchasing” the component? If necessary, round your answer to twodecimal places.
%
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