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 4,700 units of Component K2 each year. The cost per unit of this component is as follows:
Direct materials $7.53
Direct labor 2.29
Variable overhead 1.96
Fixed overhead 2.00
Total $13.78
The fixed overhead is an allocated expense; none of it would be eliminated if the production of Component K2 stopped.
Required:
1. What are the alternatives facing Zion Manufacturing with respect to the production of Component K2?
2. List the relevant costs for each alternative. If required, round your answers to the nearest cent.
If Zion decides to purchase the component from Bryce, by how much will the operating income increase or decrease?
3. Conceptual Connection: Which alter

1. Alternative 1 = Produce Component K2 in-house and Alternative 2 = Purchase Component K2 from Bryce Component Works

2.

Alternative 1 = Produce Component K2 in-house

Direct materials ($7.53  × 4,700 units)     = $35,391

Direct labor ($2.29  × 4,700 units)           = $10,763

Variable overhead ($1.96 × 4,700 units) = $  9,212

Total Cost                                                  = $55,366

Alternative 2 =Purchase Component K2 from Bryce Component Works

Purchase Cost ($12 × 4,700 units)           = $56,400

Total Cost                                                  =  $56,400

If Zion decides to purchase the component from Bryce:

Incremental Costs = $56,400 -  $55,366 = $ 1,034

Therefore, A Decrease in Operating Income of $ 1,034

3.

Alternative 1 = Produce Component K2 in-house and Alternative

(It is cheaper to produce the component in-house than to purchase it)

Explanation:

Fixed Cost will be incurred in both alternatives, therefore they are irrelevant for this decision.

Choose the option that gives a lower cost. In this case Alternative 1 gives a lower cost.

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