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	$240,200
Benefits	54,600
Supplies	29,100
Office expenses	36,400
Office depreciation	32,800
Computer depreciation	21,800
Total	$414,900

The department expects to lay out 26,000 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

Ans--- Differential Analysis

Lay out Pages Internally or Purchase layout services

Feb 22

	Layout pages internally (Alternative 1)	Purchase layout services (Alternative 2)	Differential effect on income (Alternative 2)
Sales Price
Costs:-
Purchase price of layout work		-$364,000 (26,000*$14)	-$364,000 (26,000*$14)
Salaries	-$240,200		$240,200
Benefits	-$54,600		$54,600
Supplies	-$29,100		$29,100
Office expenses	-$36,400		$36,400
Office depreciation	-$32,800	-$32,800	$0
Computer depreciation	-$21,800	-$21,800	$0
Income (Loss)			$3,700

Therefore it can be concluded that income of TAG-D will increase by $3,700, if the company purchase layout services.

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

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