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 $7.82 Direct labor 2.31 Variable overhead 1.56 Fixed overhead 3.00 Total $14.69 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?

2. 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? $ 3. Conceptual Connection: Which alternative is better?