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 25% 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. b. What would be your answer to requirement (a) if the released capacity could be used in a project that would generate $20,000 of contribution margin?
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 25% 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. b. What would be your answer to requirement (a) if the released capacity could be used in a project that would generate $20,000 of contribution margin?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
| E8-7A | 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 25% 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. | |||||||||||||||
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b. What would be your answer to requirement (a) if the released capacity could be used in a project that would generate $20,000 of contribution margin?
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