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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 $27 each. Zion uses 12,000 units of Component K2 each year. The cost per unit of this component is as follows:
Direct materials $12.00
Direct labor 8.25
Variable overhead 4.50
Fixed overhead 4.00
Total $28.75
Assume that 75% of Zion Manufacturing's fixed overhead for Component K2 would be eliminated if that component were no longer produced.
Required -
1. CONCEPTUAL CONNECTION: If Zion decides to purchase the component from Bryce, by how much will operating income increase or decrease?
2. CONCEPTUAL CONNECTION: Briefly explain how increasing or decreasing the 75% figure affects Zion's final decision to make or purchase the component.
3. CONCEPTUAL CONNECTION: By how much would the per-unit relevant fixed cost have to decrease before Zion would be indifferent (i.e., incur the same cost) between "making" versus "purchasing" the component?
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