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 $12 each. Zion uses 4,700 units of Component K2 each year. The cost per unit of this component is as follows:

Direct materials	$7.93
Direct labor	2.16
Variable overhead	1.48
Fixed overhead	3.00
Total	$14.57

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

Required:

1. What are the alternatives facing Zion Manufacturing with respect to production of Component K2?

Make the component in-house or to buy it from BryceMake the component in-house or to sell it from BryceMake the component in-house or to purchase it from BryceMake the component in-house or to buy it from Bryce

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

	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 Zion decides to purchase the component from Bryce, by how much will operating income increase or decrease?

IncreaseDecreaseDecrease

$fill in the blank 6

3. Conceptual Connection: Which alternative is better?

BuyMakeMake

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