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.

Use negative sign represent a net disadvantage answer; otherwise do not use negative signs with your answers.

Cost from outside supplier Answer

$110,000$

Variable costs avoided by purchasing Answer

$0$

Net advantage $($disadvantage$)$ to purchase alternative Answer

$0$

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?

Use negative sign represent a net disadvantage answer; otherwise do not use negative signs with your answers.

Cost from outside supplier Answer

$110,000$

Variable costs avoided by purchasing Answer

$0$

Contribution margin generated by new project Answer

$20,000$

Net advantage $($disadvantage$)$ to purchase alternative Answer

$0$