Make-or-Buy Decision The Theater Arts Guild of Miami (TAG-M) employs five people

Question

Make-or-Buy Decision

The Theater Arts Guild of Miami (TAG-M) employs five people in its Publication Department. These people lay out pages for pamphlets, brochures, magazines, and other publications for the TAG-M productions. The pages are delivered to an outside company for printing. The company is considering an outside publication service for the lay out work. The outside service is quoting a price of $21 per lay out page. The budget for the Publication Department for 2014 is as follows:

The department expects to lay out 26,000 pages for 2014. The computers used by the department have an estimated residual value of $21,800. 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 December 15, 2014, to determine whether TAG-M should lay out pages internally (Alternative 1) or purchase lay out services from the outside (Alternative 2). If an amount is zero, enter zero "0".

Differential Analysis

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

December 15, 2014

Lay out Pages Internally (Alternative 1)

Purchase Lay out Services (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues:

Salvage of computer equipment

$  

$  

$  

Costs:

Purchase price of lay out work

  

  

  

Salaries

  

  

  

Benefits

  

  

  

Supplies

  

  

  

Office expenses

  

  

  

Office depreciation

  

  

  

Computer depreciation

  

  

  

Income (loss)

$  

$  

$  

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a. Follow Example Exercise 24-3. For the make and buy alternatives provide the costs. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 2 from alternative 1.

Learning Objective 1.

b. The benefit from using an outside service is shown to be SelectgreaterlessCorrect 1 of Item 2  than performing the lay out work internally. The fixed costs (depreciation expenses) in the budget are SelectrelevantirrelevantCorrect 2 of Item 2  to the decision. Thus, the work should Selectbenot beCorrect 3 of Item 2  purchased from the outside on a strictly financial basis.

c. Before electing to SelectkeepterminateCorrect 4 of Item 2  the five employees, the guild should consider the Selectshort-run impactlong-run impactCorrect 5 of Item 2  of the decision.

Salaries $360,400 Benefits 81,900 Supplies 43,700 Office expenses 54,600 Office depreciation 49,100 Computer depreciation 32,800 Total $622,500

Explanation / Answer

DIFFERENTIAL ANALYSIS

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

December 15, 2014

Layout pages internally Purchase Layout services Differential effect

(Alternative 1) (Alternative 2) on income

(Alternative 2)

Revenues:

Salvage of

Computer equipment $21,800 $21,800 0

Costs:

Purchase price of

layout work 0 546,000 (546,000)

Salaries    360,400 0 360,400

Benefits 81,900 0 81,900

Supplies 43,700 43,700 0

Office exp 54,600 0 54,600

Office depre. 49,100 0 49,100

Computer depre. 32,800 32,800 0

Income(loss) (600,700) (600,700) 0

CONCLUSION: Since Income(Loss) is same in both the alternatives TAG-M can choose any alternative.

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