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Make - or - Buy Decision Arches Manufacturing had always made its components in - house. However, Canyonlands Component Works had recently offered to supply
MakeorBuy Decision
Arches Manufacturing had always made its components inhouse. However, Canyonlands Component Works had recently offered to supply one component, DA at a price of $ each. Arches uses units of component DA each year. The cost per unit of this component is as follows:
Line Item Description Amount
Direct materials $
Direct labor
Variable overhead
Fixed overhead
Total $
Assume that of Arches Manufacturing's fixed overhead for component DA would be eliminated if that component were no longer produced.
Required:
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 inhouse
fill in the blank of $
Which alternative is better?
Conceptual Connection: Briefly explain how increasing or decreasing the figure affects Arches's final decision to make or purchase the component.
As the percentage of avoidable fixed cost increases above total relevant costs of making the component increase, causing the "purchase" decision to be fill in the blank of
financially appealing compared to the "make" option than it was when the percentage was In other words, as the percentage increases, difference between the "purchase" and "make" options increases resulting in the "purchase" decision being even fill in the blank of
attractive. Alternatively, as the percentage of avoidable fixed costs decreases, the "make" option eventually is fill in the blank of
costly and fill in the blank of
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 fill in the blank of
option becomes the more financially appealing option
Conceptual Connection: By what dollar amount would the perunit relevant fixed cost have to decrease before Arches would be indifferent ie incur the same cost between "making" versus "purchasing" the component?
fill in the blank of $
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