Make or Buy Eastside Company incurs a total cost of $123,000 in producing 10,000

Question

Make or Buy Eastside Company incurs a total cost of $123,000 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 $10 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 $45,000 of contribution margin? 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 Contribution margin generated by new project Net advantage (disadvantage) to purchase alternative Check

Explanation / Answer

Solution a Given that total cost= 123000 to produce 10000units It includes 50% of variable cost i.e. 123000*.50 is variable cost= 61500 Variable cost per unit= 61500/10000 = 6.15 Cost from outside supplier 100000 Variable cost avoided by purchasing 61500 Net advantage (disadvantage) to purchase -38500 b in this case , out cost by buying from outside vendor will be reduced due to additionakl contribution by released capacity i.e. 100000-45000=55000 and cost to manufacture is 61500. therefore net benefit is 6500 Cost from outside supplier 100000 Variable cost avoided by purchasing 61500 Contribution from released capacity 45000 Net advantage (disadvantage) to purchase 6500

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