Question

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 $15 per layout page. The budget for the Publication Department for the current year is as follows:

Salaries $247,500
Benefits 56,300
Supplies 30,000
Office expenses 37,500
Office depreciation 33,800
Computer depreciation 22,500
Total $427,600

The department expects to lay out 25,000 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 "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Lay out Pages Internally (Alt. 1) or Purchase Lay out Services (Alt. 2)
February 22
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 $ $ $
Salaries
Benefits
Supplies
Office expenses
Office depreciation
Computer depreciation
Income (loss) $ $ $

Feedback

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 irrelevant  to the decision. Thus, the work should not be  purchased from the outside on a strictly financial basis.

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

Answer 1

Statement Showing differential Analysis ( in $)
	Internally	Outsource	Differential
Revenue:
Salvage of computer	-
Cost:
Purchase price of layout work (25000X15)	-	-375000	-375000
Salaries	-247500	-	247500
Benifits	-56300	-	56300
Supplies	-30000	-	30000
Office expense	-37500	-	37500
Office depreciation	-	-	-
Computer depreciation	-	-	-
Income / Loss	-371300	-375000	-3700
It’s not beneficial to Purchase from outside.