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 $52 each. Arches uses 12,500 units of component DA each year. The cost per unit of this component is as follows: 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)? Which alternative is better? Purchase the component from Canyonlands 2. Conceptual Connection: Briefly explain how increasing or decreasing the 80% figure affects Arches's final decision to make or purchase the component. Which alternative is better? Purchase the component from Canyonlands 2. Conceptual Connection: Briefly explain how increasing or decreasing the 80% figure affects Arches's final decision to make or purchase the component. As the percentage of avoidable fixed cost increases (above 80% ), total relevant costs of making the component increase, causing the "purchase" decision to be financially appealing (compared to the "make" option) than it was when the percentage was 80%. In other words, as the percentage increases, difference between the "purchase" and "make" options increases resulting in the "purchase" decision being even attractive. Alternatively, as the percentage of avoidable fixed costs decreases, the "make" option eventually is costly and appealing financially as the "purchase" option. Finally, as the percentage of avoidable fixed cost decreases low enough and the total relevant costs of making the component decrease, the option becomes the more financially appealing option 3. 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? $ x Feedback Check My Work 1. Relevant costs are future costs and differ across alternatives. Determine relevant costs for both alternatives. Set up four columns. First column lists all costs. Second and third columns are for alternatives, make or buy and list all amounts. Fourth column is the differential cost to make. Multiply the amount in fourth column by number of units to determine increase/decrease in operating income. 2. Consider the relevant make and buy costs