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 $13 per layout page. The budget for the Publication Department for the current year is as follows:

Salaries	$154,400
Benefits	35,100
Supplies	18,700
Office expenses	23,400
Office depreciation	21,100
Computer depreciation	14,000
Total	$266,700

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 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

Solution a:

Differential Analysis
Lay out Pages Internally (Alt. 1) or Purchase Lay out Services (Alt. 2)
22-Feb
Particulars	Lay out Pages Internally (Alternative 1)	Purchase Lay out Services (Alternative 2)	Differential Effect on Income (Alternative 2)
Selling Price	$0.00	$0.00	$0.00
Costs:
Purchase price of lay out work	$0.00	$234,000.00	$234,000.00
Salaries	$154,400.00	$0.00	-$154,400.00
Benefits	$35,100.00	$0.00	-$35,100.00
Supplies	$18,700.00	$0.00	-$18,700.00
Office expenses	$23,400.00	$0.00	-$23,400.00
Office depreciation	$21,100.00	$21,100.00	$0.00
Computer depreciation	$14,000.00	$14,000.00	$0.00
Income (loss)	-$266,700.00	-$269,100.00	-$2,400.00

Solution b:

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

Solution c:

Before electing to terminate the five employees, the guild should consider long term future impact of the decision.