make or buy 403030
1. Zorro Manufacturing had always made its components in house. However, Simpson Components Works had recently offered to supply one component, P7 43, at a price of $5 each. Zorro uses 3,850 units of component P7 43 each year. The absorption cost per unit of this component is as follows:
Direct Materials $1.30
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make or buy 403030
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Direct Labor .65
Variable Overhead 2.50
Fixed Overhead 3.00
Total $7.45
The fixed overhead is an allocated expense; none of it would be eliminated if production of component P7 43 stopped.
Required:
a. What are the alternatives facing Zorro Manufacturing with respect to production component P7 43?
b. List the relevant cost for each alternative. Which alternative is better?
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