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 $14 per layout page. The budget for the Publication Department for the current year is as follows:

Salaries	$203,300
Benefits	46,200
Supplies	24,600
Office expenses	30,800
Office depreciation	27,700
Computer depreciation	18,500
Total	$351,100

The department expects to lay out 22,000 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 layout 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 Layout Services (Alt. 2)
February 22
	Lay out Pages Internally (Alternative 1)	Purchase Lay out Services (Alternative 2)	Differential Effect on Income (Alternative 2)
Sales price	$	$	$
Costs:
Purchase price of lay out work	$	$	$
Salaries
Benefits
Supplies
Office expenses
Office depreciation
Computer depreciation
Income (loss)	$	$	$

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 Guild should consider the   of the decision.

Answer 1

a. Prepare a differential analysis dated February 22:

______________________________________________________________

b.

The benefit from using an outside service is shown to be $3,100 less than performing the layout 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 terminate the five employees, the Guild should consider the following factors:

• The long-run impact of the decision on the futures page layout rates.
• The experience level of the employees.
• Non-economic factors such as the ability to control quality issues and internal employees' timings.