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
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
Chapter1: Financial Statements And Business Decisions
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