Question

Make-or-Buy Decision

Zion Manufacturing had always made its components in-house. However, Bryce Component Works had recently offered to supply one component, K2, at a price of $12 each. Zion uses 4,200 units of Component K2 each year. The cost per unit of this component is as follows:

Direct materials	$7.61
Direct labor	2.40
Variable overhead	1.98
Fixed overhead	3.00
Total	$14.99

The fixed overhead is an allocated expense; none of it would be eliminated if production of Component K2 stopped.

Required:

1. What are the alternatives facing Zion Manufacturing with respect to production of Component K2?

Make the component in-house or to buy it from Bryce

2. List the relevant costs for each alternative. If required, round your answers to the nearest cent.

	Total Relevant Cost
Make	$ per unit
Buy	$ per unit
Differential Cost to Make	$ per unit

If Zion decides to purchase the component from Bryce, by how much will operating income increase or decrease?
Decrease  $

3. Conceptual Connection: Which alternative is better?

Answer 1

Solution 1:

alternative faced by Zion Manufacturing with respect to production of Component K2 is "Make the component in-house or to buy it from Bryce"

Solution 2:

	Total Relevant Cost
Make ($7.61 + $2.40 + $1.98)	$11.99
Buy	$12.00
Differential Cost to Make	-$0.01

If Zion decides to purchase the component from Bryce, operating income will decrease by = 4200*0.01 = $42

Solution 3:

Make alternative is better.