Exercise 13-24 Make-or-Buy Decision Refer to the information for Zion Manufactur

Question

Exercise 13-24 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.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.CONCEPTUAL CONNECTION Which alternative is better?

Explanation / Answer

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

either make K2 in-house or  purchase it externally.

What are the alternatives facing Zion Manufacturing with respect to production of Component K2?

Either make K2 in-house or  purchase it externally.

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.CONCEPTUAL CONNECTION Which alternative is better?

Making the component K2 in-house will be the best alternative because relavent cost is less compared to other alternatives

Altenativies Differential Cost to Make Buy Make Direct materials $1,20,000.00 $1,20,000.00 Direct labor 82,500.00 82,500.00 Variable overhead 45,000.00 45,000.00 Purchase cost $2,50,000.00 -2,50,000.00      Total relevant cost $2,47,500.00 $2,50,000.00 ($2,500.00)

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