Archés Manufacturing had always made its components in-house. However, Canyonlands Component Works had recently offered to supply one component, DA, at a price of $52 each. Arches uses 13,000 units of component DA each year. The cost per unit of this component is as follows: Direct materials $25.00 Direct labor 6.25 Variable overhead Fixed overhead Total 15.75 7.00 $54.00 Assume that 80% of Arches Manufacturing's fixed overhead for component DA would be eliminated if that component were no longer produced. Required: 1. Conceptual Connection: If Arches decides to purchase the component from Canyonlands, by how much will operating income increase or decrease (as compared to making the component in-house)? Increase Which alternative is better? Purchase the component from Canyonlands 2. Conceptual Connection: Briefly explain how increasing or decreasing the 80% figure affects Arches's final decision to make or purchase the component. As the percentage of avoidable fixed cost increases (above 80% ), total relevant costs of making the

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Chapter1: Financial Statements And Business Decisions
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Archés Manufacturing had always made its components in-house. However, Canyonlands Component Works had recently offered to supply one
component, DA, at a price of $52 each. Arches uses 13,000 units of component DA each year. The cost per unit of this component is as follows:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total
$25.00
6.25
15.75
7.00
$54.00
Assume that 80% of Arches Manufacturing's fixed overhead for component DA would be eliminated if that component were no longer produced.
Required:
1. Conceptual Connection: If Arches decides to purchase the component from Canyonlands, by how much will operating income increase or
decrease (as compared to making the component in-house)?
Increase
Which alternative is better?
Purchase the component from Canyonlands
2. Conceptual Connection: Briefly explain how increasing or decreasing the 80% figure affects Arches's final decision to make or purchase the
component.
As the percentage of avoidable fixed cost increases (above 80% ), total relevant costs of making the component increase, causing the
Transcribed Image Text:Archés Manufacturing had always made its components in-house. However, Canyonlands Component Works had recently offered to supply one component, DA, at a price of $52 each. Arches uses 13,000 units of component DA each year. The cost per unit of this component is as follows: Direct materials Direct labor Variable overhead Fixed overhead Total $25.00 6.25 15.75 7.00 $54.00 Assume that 80% of Arches Manufacturing's fixed overhead for component DA would be eliminated if that component were no longer produced. Required: 1. Conceptual Connection: If Arches decides to purchase the component from Canyonlands, by how much will operating income increase or decrease (as compared to making the component in-house)? Increase Which alternative is better? Purchase the component from Canyonlands 2. Conceptual Connection: Briefly explain how increasing or decreasing the 80% figure affects Arches's final decision to make or purchase the component. As the percentage of avoidable fixed cost increases (above 80% ), total relevant costs of making the component increase, causing the
Assume that 80% of Arches Manufacturing's fixed overhead for component DA would be eliminated if that component were no longer produced.
Required:
1. Conceptual Connection: If Arches decides to purchase the component from Canyonlands, by how much will operating income increase or
decrease (as compared to making the component in-house)?
Increase
Which alternative is better?
Purchase the component from Canyonlands
2. Conceptual Connection: Briefly explain how increasing or decreasing the 80% figure affects Arches's final decision to make or purchase the
component.
<
"purchase" decision to be more
As the percentage of avoidable fixed cost increases (above 80%), total relevant costs of making the component increase, causing the
✓ financially appealing (compared to the "make" option) than it was when the percentage was 80%. In
other words, as the percentage increases, difference between the "purchase" and "make" options increases resulting in the "purchase" decision
being even more
equally
✔attractive. Alternatively, as the percentage of avoidable fixed costs decreases, the "make" option eventually is
✔costly and as equally appealing financially as the "purchase" option. Finally, as the percentage of avoidable fixed
✔ option becomes the more.
cost decreases low enough and the total relevant costs of making the component decrease, the "make"
financially appealing option :
3. Conceptual Connection: By what dollar amount would the per-unit relevant fixed cost have to decrease before Arches would be indifferent
(.e., incur the same cost) between "making" versus "purchasing the component?
Transcribed Image Text:Assume that 80% of Arches Manufacturing's fixed overhead for component DA would be eliminated if that component were no longer produced. Required: 1. Conceptual Connection: If Arches decides to purchase the component from Canyonlands, by how much will operating income increase or decrease (as compared to making the component in-house)? Increase Which alternative is better? Purchase the component from Canyonlands 2. Conceptual Connection: Briefly explain how increasing or decreasing the 80% figure affects Arches's final decision to make or purchase the component. < "purchase" decision to be more As the percentage of avoidable fixed cost increases (above 80%), total relevant costs of making the component increase, causing the ✓ financially appealing (compared to the "make" option) than it was when the percentage was 80%. In other words, as the percentage increases, difference between the "purchase" and "make" options increases resulting in the "purchase" decision being even more equally ✔attractive. Alternatively, as the percentage of avoidable fixed costs decreases, the "make" option eventually is ✔costly and as equally appealing financially as the "purchase" option. Finally, as the percentage of avoidable fixed ✔ option becomes the more. cost decreases low enough and the total relevant costs of making the component decrease, the "make" financially appealing option : 3. Conceptual Connection: By what dollar amount would the per-unit relevant fixed cost have to decrease before Arches would be indifferent (.e., incur the same cost) between "making" versus "purchasing the component?
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