Question

1. 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 $16 per layout page. The budget for the Publication Department for the current year is as follows:

   Salaries	$190,100
   Benefits	43,200
   Supplies	23,000
   Office expenses	28,800
   Office depreciation	25,900
   Computer depreciation	17,300
   Total	$328,300

   The department expects to lay out 18,000 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 The area of accounting concerned with the effect of alternative courses of action on revenues and costs.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)	$	$	$

   Feedback

   b. The benefit from using an outside service is shown to be

   • more
   • less
   than performing the layout work internally. The fixed costs (depreciation expenses) in the budget are
   • relevant
   • irrelevant
   to the decision. Thus, the work should
   • be
   • not be
   purchased from the outside on a strictly financial basis.

   c. Before electing to

   • keep
   • lay off
   the five employees, the Guild should consider the
   • short-run impact
   • long-run impact
   of the decision.

Answer 1