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 12,000 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

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?

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?