Arches Manufacturing had always made its components in$-$house. However, Canyonlands Component Works had recently offered to supply one component, DA$,$ at a price of $$50$ each. Arches uses $10,500$ units of component DA each year. The cost per unit of this component is as follows:

Line Item Description Amount

Direct materials $$25\mathrm{.}00$

Direct labor $6\mathrm{.}25$

Variable overhead $15\mathrm{.}75$

Fixed overhead $7\mathrm{.}00$

Total $$54\mathrm{.}00$

Assume that $80\%$ of Arches Manufacturing's fixed overhead for component DA would be eliminated if that component were no longer produced.

Required:

$1.$ Conceptual Connection: If Arches decides to purchase the component from Canyonlands, by how much will operating income increase or decrease $($as compared to making the component in$-$house$)?$

$2.$ Conceptual Connection: By what dollar amount would the per$-$unit relevant fixed cost have to decrease before Arches would be indifferent $($i$.$e$.,$ incur the same cost$)$ between "making" versus "purchasing" the component?