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

Salaries	$224,000
Benefits	36,000
Supplies	21,000
Office expenses	39,000
Office depreciation	28,000
Computer depreciation	24,000
Total	$372,000

The department expects to lay out 24,000 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".

Answer 1

Solution:

Differential Analysis
Lay out Pages Internally (Alt. 1) or Purchase Lay out Services (Alt. 2)
Feb-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	$0	-$3,12,000	-$3,12,000
Salaries	-$2,24,000	$0	$2,24,000
Benefits	-$36,000	$0	$36,000
Supplies	-$21,000	$0	$21,000
Office expenses	-$39,000	$0	$39,000
Office depreciation	-$28,000	-$28,000	$0
Computer depreciation	-$24,000	-$24,000	$0
Income (loss)	-$3,72,000	-$3,64,000	$8,000

TAG-D should purchase layout services from the outside.