Eastern Company Currently Produces a Component That It Uses in Making

question 27

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

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Definitions:

Federal Reserve System

The central banking system of the United States, responsible for monetary policy.

Issuing Federal Reserve Notes

The process by which the Federal Reserve, the central banking system of the United States, distributes its official currency.

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The interest rate paid by banks to depositors for keeping their money in savings accounts, fixed deposits, or other types of deposit accounts.