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 a) if the released capacity could be uses in a project that would generate $50,000 of b. What would be your answer to requirement ( contribution margin? . Use negative sign represent t 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 alternatives Check

Explanation / Answer

Answers

x + 0.5x = 120000

1.5x = 120000

x = 120000 / 1.5

x = 80000

Variable cost

$80,000

(+) Fixed cost (50% of variable)

$40,000

Total cost to produce

$12,0000

Cost from outside supplier

[10000 x $11]

$110,000

Variable cost avoided by purchasing

[calculated above]

$80,000

Net advantage (disadvantage) to purchase alternative

$(30,000)

Cost from outside supplier

$110,000

Variable cost avoided by purchasing

$80,000

Contribution margin generated

$50,000

Net advantage (disadvantage) to purchase alternative [80000 – 110000 + 50000]

$20,000

x + 0.5x = 120000

1.5x = 120000

x = 120000 / 1.5

x = 80000

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