Make$-$or$-$Buy Decision

Assume that $80\%$ 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 in$-$house$)?$

$?$ $

Which alternative is better?

Purchase the component from Canyonlands :

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

costly and

i$.$ 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