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 $28 each. Zion uses 13,000 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	6.00
Total	$30.75

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?

2. CONCEPTUAL CONNECTION: Briefly explain how increasing or decreasing the 75% figure affects Zions final decision to make or purchase the component.

As the percentage of avoidable fixed 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?

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