Make-or-Buy Decision Zion Manufacturing had always made its components in-house.

Question

Make-or-Buy Decision 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 $12 each. Zion uses 4,500 units of Component K2 each year. The cost per unit of this component is as follows: Direct materials $7.11 Direct labor 2.32 Variable overhead 1.89 Fixed overhead 3.00 Total $14.32 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? Make the component in-house or to buy it from Bryce 2. 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

Explanation / Answer

1) the two alternatives are (1) to accept the special order (2) to reject the special order 2) Relevant cost Make Buy difference Direct materials 7.11 7.11 direct labor 2.32 2.32 variable overhead 1.89 1.89 purchase price 12 -12 total relevant cost 11.32 12 -0.68 Since the cost of buying is more than the cost of making , it should reject the special order

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