Make-or-Buy Decision

Zion Manufacturing had always made its components in-house. However, Bryce Component Works had recently offered to supply one component, K2, at a price of $25 each. Zion uses 10,000 units of Component K2 each year. The cost per unit of this component is as follows:

Direct materials	$12.00
Direct labor	8.25
Variable overhead	4.50
Fixed overhead	2.00
Total	$26.75

The fixed overhead is an allocated expense; none of it would be eliminated if production of Component K2 stopped.

Required:

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

	Total Relevant Cost
Make	$__________ per unit
Buy	$__________ per unit
Differential Cost to Make	$ __________per unit

If Zion decides to purchase the component from Bryce, by how much will operating income increase or decrease? Increase or Decrease? $__________

2. Conceptual Connection: Which alternative is better? Buy or Make?