Make$-$or$-$Buy Decision

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 $100,000$ 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 $5\mathrm{.}00$

Total $$52\mathrm{.}00$

The fixed overhead is an allocated expense; none of it would be eliminated if production of component DA stopped.

Required:

$1.$ What are the alternatives facing Arches Manufacturing with respect to production of component DA$?$

Make the component in$-$house or buy it from Canyonlands

$2.$ List the relevant costs for each alternative. If required, round your answers to the nearest cent.

Line Item Description Total Relevant Cost

Make $fill in the blank $2$

per unit

Buy $fill in the blank $3$

$50$

per unit

Differential Cost to Make $fill in the blank $4$

per unit

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$)?$

Decrease

fill in the blank $1$ of $1$$

$3.$ Conceptual Connection: Which alternative is better?

Make