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How much will operating income increase or decrease

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Reference no: EM132821526

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 $25 each. Zion uses 12,500 units of Component K2 each year. The cost per unit of this component is as follows:

Direct materials $12.00

Direct labor 8.2

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:

Problem 1. CONCEPTUAL CONNECTION: If Zion decides to purchase the component from Bryce, by how much will operating income increase or decrease?

Reference no: EM132821526

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