Question

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 4,100 units of Component K2 each year. The cost per unit of this component is as follows:

Direct materials	$7.22
Direct labor	2.67
Variable overhead	1.28
Fixed overhead	4.00
Total	$15.17

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?

Options:

• Make the component in-house or to buy it from Bryce
• Make the component in-house or to sell it from Bryce
• Make the component in-house or to purchase 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?
Increase or decrease by $

3. Conceptual Connection: Which alternative is better?

Buy or Make

Answer 1

Answer-1-Tha correct option is a-

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

2-

Relevant cost
				make	buy
	direct materials		7.22
	direct labor		2.67
	variable overhead		1.28
	buy				$12
	total			$11.17	$12
	make			$11.17 per unit
	buy			12 per unit
	differental cost to make	.83 per unit
	operating income will increase by .83*4,100=	3,403

3-Option make is better.