Chap lo Make-or-Buy Decision for a Service Company The Theater Arts Guild of Dal

Question

Chap lo Make-or-Buy Decision for a Service Company The Theater Arts Guild of Dallas (TAG-D) employs five people in its Publication Department. These people lay out pages for pamphlets, brochures, magazines, and other publications for the TAG-D productions. The pages are delivered to an outside company for printing. The company is considering an outside publication service for the layout work. The outside service quoting a price of $19 per layout page. The budget for the Publication Department for the current year is as follows: Salaries Benefits Office expenses Office depreciation Computer depreciation Total $225,700 51,300 27,400 34,200 30,800 20,500 $389,900 The department expects to lay out 18,000 pages for the current year. The Publication Department office space and equipment would be used for future administrative needs, if the department's function were purchased from the outside a. Prepare a differential analysis dated February 22 to determine whether TAG-D should lay out pages internally (Alternative 1) or purchase layout services from the outside (Alternative 2). If an amount is zero, enter "O". For those boxes in which you must enter subtracted or negative numbers use a minus sign. Lay out Pages Internally (Alt. 1) or Purchase Lay out Services (Alt. 2) Lay out Pages Internally Purchase Lay out Services Differential Effect on Income (Alternative 1) $0 (Alternative 2) s0 Selling Price Costs: Purchase price of lay out s0 Salaries Benefits Supplies Office expenses Office depreciation Computer depreciation Income (loss) b. The benefit from using an outside service is shown to be The fixed costs (depreciation expenses) in the budget are than the lay out work internally. to the decision. Thus, the work should purchased from the outside on a strictly financial basis. c. Before electing to the five employees, the guild should consider the of the decision.

Explanation / Answer

a) Differential Analysis

Lay out Pages Internally (Alt. 1) or Purchase Lay out Services (Alt. 2)

February 22 (Amounts in $)

b) The benefit from using an outside service is shown to be less than performing the lay out work internally. The fixed costs (depreciation expenses) in the budget are not relevant to the decision. Thus, the work should not purchased from the outside on a strictly financial basis.

c) Before electing to terminate the five employees, the guild should consider the long-run impact of the decision.

Lay out Pages Internally (Alternative 1) Purchase Lay out Services (Alternative 2) Differential Effect on Income (Alternative 2) Selling Price 0 0 0 Costs: Purchase price of lay out work 0 (18,000 pages*$19) = 342,000 (342,000) Salaries 225,700 0 225,700 Benefits 51,300 0 51,300 Supplies 27,400 0 27,400 Office expenses 34,200 0 34,200 Office depreciation 30,800 30,800 0 Computer depreciation 20,500 20,500 0 Income (Loss) (389,900) (393,300) (3,400)

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