Eastern Company Currently Produces a Component That It Uses in Making

question 140

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 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?

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