Textbook Problem

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:

8-39 Make-or-Buy Decision

Refer to the information for Zion Manufacturing above. Assume that 75% of Zion Manufacturing’s fixed overhead for Component K2 would be eliminated if that component were no longer produced.

Required:

1. 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. 2. CONCEPTUAL CONNECTION Briefly explain how increasing or decreasing the 75% figure affects Zion’s final decision to make or purchase the component.
3. 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? Show and briefly explain your calculations.