Question: 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 $25 each. Zion uses 10,000 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
Make-or-Buy Decision Refer to the information for Zion Manufacturing above. 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. Conceptual Connection: List the relevant costs for each alternative. If Zion decides to purchase the component from Bryce, by how much will operating income increase or decrease? Which alternative is better?