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 part: $$\begin{array} { | l | r | }
\hline \text { Unit-level costs } & \
\hline \text { Materials } & \$ 20 \
\hline \text { Labor } & 28 \
\hline \text { Overhead } & 2 \
\hline \text { Allocated facility-level costs } & \underline { 10 } \
\hline \text { Total cost } & \$ 60 \
\hline
\end{array}$$
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 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 part: $$\begin{array} { | l | r | } 
\hline \text { Unit-level costs } & \
\hline \text { Materials } & \$ 20 \
\hline \text { Labor } & 28 \
\hline \text { Overhead } & 2 \
\hline \text { Allocated facility-level costs } & \underline { 10 } \
\hline \text { Total cost } & \$ 60 \
\hline
\end{array}$$ 
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 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 part: $$\begin{array} { | l | r | } 
\hline \text { Unit-level costs } & \
\hline \text { Materials } & \$ 20 \
\hline \text { Labor } & 28 \
\hline \text { Overhead } & 2 \
\hline \text { Allocated facility-level costs } & \underline { 10 } \
\hline \text { Total cost } & \$ 60 \
\hline
\end{array}$$ 
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 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