Refer to the information for Arches Manufacturing above. The fixed overhead is an allocated expense; none of it would be eliminated if production of component DA stopped.

Required :

1. What are the alternatives facing Arches Manufacturing with respect to production of component DA ?

2. List the relevant costs for each alternative. If Arches decides to purchase the component from Canyonlands , by how much will operating income increase or decrease (as compared to making the component in -house) ?

3. CONCEPTUAL CONNECTION Which alternative is better ?