Question

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 4,800 units of Component K2 each year. The cost per unit of this component is as follows:

Direct materials $7.36

Direct labor 2.66

Variable overhead 1.15

Fixed overhead 4.00

Total $15.17


The fixed overhead is an allocated expense; none of it would be eliminated if production of Component K2 stopped.List the relevant costs for each alternative.

Answer 1

Answer and Explanation:

The list of relevant costs for each alternative is shown below:-

Make Buy

Direct materials $7.36

Direct Labor $2.66

Variable overhead $1.15

Buy $12

Total $11.17 $12

Differential cost to make = Make - Buy

= $11.17 - $12

= $0.83