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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Use the following information for Exercises 8-38 and 8-39:

Zion Manufacturing had always made its components in-hours. 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 components is as follows:

Chapter 8, Problem 38E, Use the following information for Exercises 8-38 and 8-39: Zion Manufacturing had always made its

8-38 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. 1. What are the alternatives facing Zion Manufacturing with respect to production of Component K2?
  2. 2. 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?
  3. 3. CONCEPTUAL CONNECTION Which alternative is better?

1.

To determine

Describe the alternatives with Company Z regarding the production of component K2.

Explanation

Make-or-Buy Decisions:

The common problem for the managers is to make a decision about whether to purchase a product from the supplier or to produce a specific product. The decisions which involve the choice between external production and internal production are known as make-or-buy decisions...

2.

To determine

State the relevant costs for each alternative. Also, calculate whether the operating income will increase or decrease if the component is purchased.

3.

To determine

Identify the best alternative.

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