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 $26 each. Zion uses 10,500 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 4.00 Total $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? Which alternative is better? Make the component in house efly explain how increasing or decreasing the 75% figure affects Zion's final decision to make or purchase the component. Purchase the component from Bryce d cost increases (above 75%), 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 75%. In other words, as the percentage increases, difference between the "purchase" and "make" options increases resulting in the "purchase" decision being even attractive. Alternatively, as the percentage of avoidable fixed costs decreases, the "make" option eventually is costly and 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 3. 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? $Special Order Smooth Move Company manufactures professional paperweights and has been approached by a new customer with an offer to purchase 15,000 units at a per-unit price of $7.00. The new customer is geographically separated from Smooth Move's other customers, and existing sales will not be affected. Smooth Move normally produces 94,000 units but plans to produce and sell only 65,000 in the coming year. The normal sales price is $13 per unit. Unit cost information is as follows: Direct materials $3.10 Direct labor 2.75 Variable overhead 1.15 Fixed overhead 1.80 Total $8.80 Suppose a customer wants to have its company logo afxed to each paperweight using a label. Smooth Move would have to purchase a special logo labeling machine that will ' cost $12,000. The machine will be able to label the 15,000 units and then it will be scrapped (with no further value). No other fixed overhead activities will be incurred. In addition, each special logo requires additional direct materials of $0.20. Required: CONCEPTUAL CONNECTION: Should Smooth Move accept the special order? v By how much will prot increase or decrease if the order is accepted? If your answer is decrease, enter negative value. Decrease Keepor-Drop Decision Petoskey Company produces three products: Alanson, Boyne, and Conway. A segmented income statement, with amounts given in thousands, follows: Alanson Boyne Conway Total Sales revenue $1,280 $185 $285 $1,750 Less: Variable expenses 1,115 45 214 1,374 Contribution margin $165 $140 $71 $376 Less direct fixed expenses: Depreciation 50 15 11 76 Salaries 95 85 72 252 Segment margin $20 $40 $(12) $48 Direct xed expenses consist of depreciation and plant supervisory salaries. All depreciation on the equipment is dedicated to the product lines. None of the equipment can be sold. Assume that, each of the three products has a different supervisor whose position would be eliminated if the associated product were dropped. Assume that 20% of the Alanson customers choose to buy from Petoskey because it offers a full range of products, including Conway. If Conway were no longer available from Petoskey, these customers would go elsewhere to purchase Alanson. Required: Conceptual Connection: Estimate the impact on profit that would result from dropping Conway. Enter amount in full, rather than in thousands. For example, "15000" rather than "15". '$:l Should Petoskey keep or drop Conway? v