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
The fixed overhead is an allocated expense; none of it would be eliminated if the production of Component K2 stopped.
Required:
List the relevant costs for each alternative. If required, round your answers to the nearest cent.
Total Relevant Cost
Make $ per unit
Buy $ per unit
Differential Cost to Make $ per unit
If Zion decides to purchase the component from Bryce, by how much will operating income increase or decrease?
Answers: 3
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