Eastern Company currently produces a component that it uses in making some of its products.The company has calculated the following costs for making the component:
$$\begin{array} { l r }
\text { Unit-level costs } & \
\text { Materials } & \$ 2 0 \
\text { Labor } & 28 \
\text { Overhead } & 2 \
\text { Allocated facility-level costs } & \underline {10} \
\text { Total cost } & \underline {\$ 6 0 } \

\end{array}$$ Eastern is considering outsourcing the component.A supplier has offered to sell the component to Eastern for $55 each.Eastern needs 10,000 units each year.If Eastern does outsource the component,it can use the facilities to make another product that would yield a contribution margin of $60,000 per year.
Required:
1)Should Eastern outsource the component? Support your answer with appropriate computations.
2)What qualitative factors should be considered in this decision?

Question

Eastern Company currently produces a component that it uses in making some of its products.The company has calculated the following costs for making the component:
 $$\begin{array} { l r } 
\text { Unit-level costs } & \
\text { Materials } & \$ 2 0  \
\text { Labor } & 28 \
\text { Overhead } & 2 \
\text { Allocated facility-level costs } &  \underline {10} \
 \text { Total cost } &  \underline {\$  6 0 } \

\end{array}$$ Eastern is considering outsourcing the component.A supplier has offered to sell the component to Eastern for $55 each.Eastern needs 10,000 units each year.If Eastern does outsource the component,it can use the facilities to make another product that would yield a contribution margin of $60,000 per year.
Required:
1)Should Eastern outsource the component? Support your answer with appropriate computations.
2)What qualitative factors should be considered in this decision?

Quizplus · Accepted Answer

The Answer of Eastern Company currently produces a component that it uses in making some of its products.The company has calculated the following costs for making the component:
 $$\begin{array} { l r } 
\text { Unit-level costs } & \
\text { Materials } & \$ 2 0  \
\text { Labor } & 28 \
\text { Overhead } & 2 \
\text { Allocated facility-level costs } &  \underline {10} \
 \text { Total cost } &  \underline {\$  6 0 } \

\end{array}$$ Eastern is considering outsourcing the component.A supplier has offered to sell the component to Eastern for $55 each.Eastern needs 10,000 units each year.If Eastern does outsource the component,it can use the facilities to make another product that would yield a contribution margin of $60,000 per year.
Required:
1)Should Eastern outsource the component? Support your answer with appropriate computations.
2)What qualitative factors should be considered in this decision?

Eastern Company Currently Produces a Component That It Uses in Making