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Make-or-Buy Decision for a Service Company

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 $19 per layout page. The budget for the Publication Department for the current year is as follows:

Salaries $213,200
Benefits 48,500
Supplies 25,800
Office expenses 32,300
Office depreciation 29,100
Computer depreciation 19,400
Total $368,300

The department expects to lay out 17,000 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) $ $ $

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.

 

 

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Sep 22 2020 Read more Less More

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