1. Zorro Manufacturing had always made its components in house. However Simpso

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 3850 units of component P7-43 each year. The absorption cost per unit of this component is as follows:

Direct Materials $1.30

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?