Eastern Company Currently Produces a Component That It Uses in Making

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?

Correct Answer:

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1) The total cost to outsource the comp...

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