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 is quoting a price of $13 per layout page. The budget for the Publication Department for the current year is as follows:

Salaries	$224,000
Benefits	36,000
Supplies	21,000
Office expenses	39,000
Office depreciation	28,000
Computer depreciation	24,000
Total	$372,000

The department expects to lay out 24,000 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".

Differential Analysis
Lay Out Pages Internally (Alt. 1) or Purchase Layout Services (Alt. 2)
February 22
	Lay Out Pages Internally (Alternative 1)	Purchase Layout Services (Alternative 2)	Differential Effects (Alternative 2)
Costs:
Purchase price of layout work	$fill in the blank 4e2ee1fc2fa302a_1	$fill in the blank 4e2ee1fc2fa302a_2	$fill in the blank 4e2ee1fc2fa302a_3
Salaries	fill in the blank 4e2ee1fc2fa302a_4	fill in the blank 4e2ee1fc2fa302a_5	fill in the blank 4e2ee1fc2fa302a_6
Benefits	fill in the blank 4e2ee1fc2fa302a_7	fill in the blank 4e2ee1fc2fa302a_8	fill in the blank 4e2ee1fc2fa302a_9
Supplies	fill in the blank 4e2ee1fc2fa302a_10	fill in the blank 4e2ee1fc2fa302a_11	fill in the blank 4e2ee1fc2fa302a_12
Office expenses	fill in the blank 4e2ee1fc2fa302a_13	fill in the blank 4e2ee1fc2fa302a_14	fill in the blank 4e2ee1fc2fa302a_15
Office depreciation		fill in the blank 4e2ee1fc2fa302a_16	fill in the blank 4e2ee1fc2fa302a_17
Computer depreciation		fill in the blank 4e2ee1fc2fa302a_18	fill in the blank 4e2ee1fc2fa302a_19
Total costs	$fill in the blank 4e2ee1fc2fa302a_20	$fill in the blank 4e2ee1fc2fa302a_21	$fill in the blank 4e2ee1fc2fa302a_22

b. The benefit from using an outside service is shown to be _____ than performing the layout work internally. The fixed costs (depreciation expenses) in the budget are _____ to the decision. Thus, the work should ______ purchased from the outside on a strictly financial basis.

c. Before electing to _____ the five employees, the TAG-D should consider the ____ of the decision.

Answer 1

a.

Differential Analysis
Lay out Pages Internally (Alt. 1) or Purchase Lay out Services (Alt. 2)
Feb-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	$0	-$3,12,000	-$3,12,000
Salaries	-$2,24,000	$0	$2,24,000
Benefits	-$36,000	$0	$36,000
Supplies	-$21,000	$0	$21,000
Office expenses	-$39,000	$0	$39,000
Office depreciation	-$28,000	-$28,000	$0
Computer depreciation	-$24,000	-$24,000	$0
Income (loss)	-$3,72,000	-$3,64,000	$8,000

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