Question

Zion Manufacturing had always made its components in-house.

Answer 1

Answer:

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.