1. List the relevant costs of the make and buy alternatives in the table below. | ||||
Alternatives | Differential Cost to Make | |||
Make | Buy | |||
Direct materials | ||||
Direct labor | ||||
Variable overhead | ||||
Purchase cost | ||||
Total relevant cost |
2. If Zion decides to buy the component from Bryce, will operating income increase or decrease, and by how much?
3. Assume that 75% of Zion Manufacturing's fixed overhead for Component K2 would be eliminated if that component were no longer produced. If Zion decides to purchase the component from Bryce, by how much will operating income increase or decrease? Which alternative is better?
4. Briefly explain how DECREASING the 75% of fixed overhead for Component K2 would affect Zion's decision to make or buy the component.
Answer 1
Alternatives | Differential Cost to Make | ||
Make | Buy | ||
Direct materials | $ 120,000 | $ - | $ (120,000) |
Direct labor | $ 82,500 | $ - | $ (82,500) |
Variable overhead | $ 45,000 | $ - | $ (45,000) |
Purchase cost | $ - | $ 250,000 | $ 250,000 |
Total relevant cost | $ 247,500 | $ 250,000 | $ 2,500 |
Answer 2
If Zion decides to buy the component from Bryce, operating income will decrease by $ 2,500.
Answer 3
Operating income will increase by $ 12,500.
Better to buy the product.
Explanations:
Alternatives | Differential Cost to Make | ||
Make | Buy | ||
Direct materials | $ 120,000 | $ - | $ (120,000) |
Direct labor | $ 82,500 | $ - | $ (82,500) |
Variable overhead | $ 45,000 | $ - | $ (45,000) |
Fixed Cost | $ 20,000 | $ 5,000 | |
Purchase cost | $ - | $ 250,000 | $ 250,000 |
Total relevant cost | $ 267,500 | $ 255,000 | $ (12,500) |
Answer 4
Decreasing 75% of the fixed overheads will change the decision of the company.
If the cost is not reduced, it is better to make the product. Now, as the fixed cost is reduced by 75%, it is better to buy the product.
In case of any doubt, please comment.
1. List the relevant costs of the make and buy alternatives in the table below. Alternatives...
1. List the relevant costs of the make and buy alternatives in the table below. Alternatives Differential Cost to Make Make Buy Direct materials Direct labor Variable overhead Purchase cost Total relevant cost 2. If Zion decides to buy the component from Bryce, will operating income increase or decrease, and by how much? 3. Assume that 75% of Zion Manufacturing's fixed overhead for Component K2 would be eliminated if that component were no longer produced. If Zion decides to purchase...
1. List the relevant costs of the make and buy alternatives in the table below. Alternatives Differential Cost to Make Make Buy Direct materials Direct labor Variable overhead Purchase cost Total relevant cost 2. If Zion decides to buy the component from Bryce, will operating income increase or decrease, and by how much? 3. Assume that 75% of Zion Manufacturing's fixed overhead for Component K2 would be eliminated if that component were no longer produced. If Zion decides to purchase...
1. List the relevant costs of the make and buy alternatives in the table below. Alternatives Differential Cost to Make Make Buy Direct materials Direct labor Variable overhead Purchase cost Total relevant cost 2. If Zion decides to buy the component from Bryce, will operating income increase or decrease, and by how much? 3. Assume that 75% of Zion Manufacturing's fixed overhead for Component K2 would be eliminated if that component were no longer produced. If Zion decides to purchase...
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 4,200 units of Component K2 each year. The cost per unit of this component is as follows: Direct materials $7.61 Direct labor 2.40 Variable overhead 1.98 Fixed overhead 3.00 Total $14.99 The fixed overhead is an allocated expense; none of it would be eliminated if production of Component K2 stopped....
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 4,900 units of Component K2 each year. The cost per unit of this component is as follows: Direct materials $7.65 Direct labor 2.80 Variable overhead 1.40 Fixed overhead 3.00 Total $14.85 The fixed overhead is an allocated expense; none of it would be eliminated if production of Component K2 stopped....
Make-or-Buy Decision Zion Manufacturing had always made its components in-house. However, Bryce Component Works had recently offered to a price of $12 each. Zion uses 4,600 units of Component K2 each year. The cost per unit of this component is as follows: Direct materials $7.51 Direct labor 2.58 Variable overhead 1.82 Fixed overhead 4.00 Total $15.91 The fixed overhead is an allocated expense; none of it would be eliminated if production of Component K2 stopped. Required: Required: 1. What are...
Questions 1 & 2 in Photo 1 Question 3 in Photo 2 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 $13 each. Zion uses 4,600 units of Component K2 each year. The cost per unit of this component is as follows: Direct materials $7.59 2.91 Direct labour Variable overhead 1.89 3.00 Fixed overhead $15.39 Total The fixed overhead is an allocated expense;...
Make-or-Buy Decision, Alternatives, Relevant Costs Each year, Basu Company produces 13,000 units of a component used in microwave ovens. An outside supplier has offered to supply the part for $1.31. The unit cost is: Direct materials $0.89 Direct labor 0.27 Variable overhead 0.07 Fixed overhead 2.10 Total unit cost $3.33 Required: 1. What are the alternatives for Basu Company? Make the part in house or buy the part externally 2. Assume that none of the fixed cost is avoidable. List...
Wilma Company must decide whether to make or buy some of its components. The costs of producing 63,800 switches for its generators are as follows. Direct materials $29,300 Variable overhead $44,200 Direct labor $30,634 Fixed overhead $82,800 Instead of making the switches at an average cost of $2.93 ($186,934 ÷ 63,800), the company has an opportunity to buy the switches at $2.74 per unit. If the company purchases the switches, all the variable costs and one-fourth of the fixed costs...
Blossom Company must decide whether to make or buy some of its components. The costs of producing 65,700 switches for its generators are as follows. Direct materials $31,000 Direct labor $34,229 Variable overhead $45,900 Fixed overhead $84,000 Instead of making the switches at an average cost of $2.97 ($195,129 = 65,700), the company has an opportunity to buy the switches at $2.71 per unit. If the company purchases the switches, all the variable costs and one-fourth of the fixed costs...