LaSalle Manufacturing had always made its components in-house. However, Jasper Component Works had recently offered to supply one component, C-430, at a price of $12 each. LaSalle uses 4,600 units of Component C-430 each year. The cost per unit of this component is as follows:
Direct materials$7.75Direct labor2.46Variable overhead1.24Fixed overhead4.00 Total$15.45
The fixed overhead is an allocated expense; none of it would be eliminated if production of Component C-430 stopped.
1. List the relevant costs for each alternative. If required, round your answers to two decimal places.
Total Relevant CostMake$per unitBuy$per unitDifferential Cost to Make$per unit
If LaSalle decides to purchase the component from Jasper, by how much will operating income increase or decrease?
2. Conceptual Connection: Which alternative is better?