Eastside Company incurs a total cost of $150,000 in producing 10,000 units of a

Question

Eastside Company incurs a total cost of $150,000 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 $Answer Variable costs avoided by purchasing Answer Net advantage (disadvantage) to purchase alternative $Answer b. What would be your answer to requirement (a) if the released capacity could be used in a project that would generate $30,000 of contribution margin? Use negative sign represent a net disadvantage answer; otherwise do not use negative signs with your answers. Cost from outside supplier $Answer Variable costs avoided by purchasing Answer Contribution margin generated by new project Answer Net advantage (disadvantage) to purchase alternative $Answer

Explanation / Answer

Calculation of Fixed cost Total Cost = Variable Cost + Fixed Cost Fixed Cost if 50% of Variabke Cost Lets assume fixed cost be "X" $150,000 = 2X + X X = $50,000 Therefore fixed cost = $50,000 Requirement a. Cost from outside supplier $1,10,000 (10,000*$11) Variable Cost avoided by purchasing $1,00,000 ($150,000-$50,000) Net Advantage (Disadvantage) -$10,000 Requirement b. Cost from outside supplier $1,10,000 (10,000*$11) Variable Cost avoided by purchasing $1,00,000 ($150,000-$50,000) Contribution Marrgin generated by new project $30,000 Given Net Advantage (Disadvantage) $20,000

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