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 $27 each. Zion uses 10,500 units of Component K2 each year. The cost per unit of this component is as follows:

Direct materials$12.00Direct labor8.25Variable overhead4.50Fixed overhead4.00Total$28.75

Assume that 75% of Zion Manufacturing's fixed overhead for Component K2 would be eliminated if that component were no longer produced.

Required:

1.Conceptual Connection: If Zion decides to purchase the component from Bryce, by how much will operating income increase or decrease?

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Which alternative is better?

2.Conceptual Connection: By how much would the per unit relevant fixed cost have to decrease before Zion would be indifferent (i.e., incur the same cost) between "making" versus "purchasing" the component? If necessary, round your answer to two decimal places.

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