MAKE-OR-BUY DECISION Zion Manufacturing had always made its components in-house. However, Bryce Component Works recently offered to supply one component, K2, at a price of $25 each.

Zion uses 10,000 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 3.50 Fixed overhead 2.00 Total $25.75 The fixed overhead is an allocated expense; none of it would be eliminated if production of Component K2 stopped.
Required:
. What are the alternatives facing Zion Manufacturing with respect to production of Component K2?
. List the relevant costs for each alternative.
. If Zion decides to purchase the component from Bryce, by how much will operating income increase or decrease? Which alternative is better?
Exercise