Eastern Company Currently Produces a Component That It Uses in Making

question 43

Essay

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

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Definitions:

Reliability

The degree to which an assessment tool produces stable and consistent results across different occasions.

Love Measurement

Quantitative and qualitative methods used to assess the intensity, duration, and type of love between individuals or within oneself.

High Reliability

Pertains to systems or organizations that operate in complex, high-hazard domains for extended periods without serious accidents or catastrophic failures.

Scores Correlate

A statistical relationship indicating that as scores on one measure increase, scores on another measure either increase or decrease systematically.