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 $12 per layout page. The budget for the Publication Department for the current year is as follows:

Salaries	$174,200
Benefits	39,600
Supplies	21,100
Office expenses	26,400
Office depreciation	23,800
Computer depreciation	15,800
Total	$300,900

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 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)	$	$	$

b. The benefit from using an outside service is shown to be than performing the lay out 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	Differential Analysis
	Lay Out Pages Internally (Alt. 1) or Purchase Layout Services (Alt. 2)
	February 22
		Lay Out Pages Internally	Purchase Layout Services	Differential
		(Alternative 1)	(Alternative 2)	Effect
				on Income
				(Alternative 2)
	Revenues:
	Salvage of computer equipment	$0	$0	$0
	Costs:
	Purchase price of layout work	0	–264,000*	–264,000
	Salaries	–174,200	0	174,200
	Benefits	–39,600	0	39,600
	Supplies	–21,100	0	21,100
	Office expenses	–26,400	0	26,400
	Office depreciation	–23,800	–23,800	0
	Computer depreciation	–15,800	–15,800	0
	Income (Loss)	–$300,900	–$303,600	–$2,700
	* 22,000 pages × $12 per page
b	The benefit from using an outside service is shown to be $2,700 lesser 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 retain the five employees, the guild should consider the long-run impact of the decision. Specifically, future page layout rates may grow slower than the cost of internal salaries, thus favoring the purchase over the long term.
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