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 $12 each. Arches uses 4,700 units of component DA each year. The cost per unit of this component is as follows:

Line Item Description	Amount
Direct materials	$7.92
Direct labor	2.22
Variable overhead	1.31
Fixed overhead	4.00
Total	$15.45

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 to buy it from CanyonlandsMake the component in-house or to sell 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 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)?

IncreaseDecrease

fill in the blank 1 of 1$

3. Conceptual Connection: Which alternative is better?

BuyMake