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 $13 per layout page. The budget for the Publication Department for the current year is as follows: Salaries Benefits $223,100 50,700 27,000 Supplies 33,800 30,400 Office expenses Office depreciation Computer depreciation Total 20,300 $385,300 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 lay out pages internally (Alternative 1) or purchase layout services from the outside (Alternative 2). If an amount is zero, enter "O". 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

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	$338,000.00	$338,000.00
Salaries	$223,100.00	$0.00	-$223,100.00
Benefits	$50,700.00	$0.00	-$50,700.00
Supplies	$27,000.00	$0.00	-$27,000.00
Office expenses	$33,800.00	$0.00	-$33,800.00
Office depreciation	$30,400.00	$30,400.00	$0.00
Computer depreciation	$20,300.00	$20,300.00	$0.00
Income (loss)	-$385,300.00	-$388,700.00	-$3,400.00

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.