Make or Buy Eastside Company incurs a total cost of $120,000 in producing 10,000

Question

Make or Buy Eastside Company incurs a total cost of $120,000 in producing 10,000 units of a component needed in the assembly of its major product. The component can be purchased from an outside supplier for $11 per unit. A related cost study indicates that the total cost of the component includes fixed costs equal to 50% of the variable costs involved. a. Should Eastside buy the component if it cannot otherwise use the released capacity? Present your answer in the form of differential analysis. Use negative sign represent a net disadvantage answer; otherwise do not use negative signs with your answers. Cost from outside supplier Variable costs avoided by purchasing Net advantage (disadvantage) to purchase alternative b. What would be your answer to requirement (a) if the released capacity could be used in a project that would generate $50,000 of contribution margin? e negative sign represent a net disadvantage answer; otherwise do not use negative signs with your answers. Cost from outside supplier Variable costs avoided by purchasing

Explanation / Answer

Total cost of 10,000 units is $120,000.

Fixed cost is 50% of variable cost.

Therefore,

Variable costs = $120,000 x 2/3 = $80,000

And,

Fixed costs = $120,000 x 1/3 = $40,000

a.

Prepare the differential analysis as follows:

b.

In this case, the differential analysis will be prepared as follows:

Cost from outside supplier (10,000 x $11) $110,000 Variable costs avoided by purchasing 80,000 Net advantage (disadvantage) to purchase alternative ($30,000)

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