Question

Make-or-Buy Decision

Wisconsin Arts of Milwaukee employs five people in its Publication Department. These people lay out pages for pamphlets, brochures, and other publications for the 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 is as follows:

Salaries	$184,000
Benefits	53,000
Supplies	29,000
Office expenses	20,000
Office depreciation	49,200
Computer depreciation	32,800
Total	$368,000

The department expects to lay out 28,800 pages. The computers used by the department have an estimated residual value of $21,900. The Publication Department office space would be used for future administrative needs if the department's function were purchased from the outside.

a. Prepare a differential analysis report for the make-or-buy decision, considering the differential revenues and costs. Enter differential revenues and cost savings as positive amounts; enter differential expenses and cost increases as negative amounts.

WISCONSIN ARTS OF MILWAUKEE
Purchase Outside Page Layout Services
Differential Analysis Report
Differential revenue:
Residual value of computer equipment		$
Differential cost of alternatives:
Purchase price of layout work:
Number of pages
Price per page	× $
Total differential costs		$
Cost to perform internally:
Salaries	$
Benefits
Supplies
Office expenses
		$
		$

b. Which costs are irrelevant to the Wisconsin Arts decision?

1. The residual value of the computers
2. The office depreciation
3. The computer depreciation
4. The service price to the outside company

Select the irrelevant cost(s) from above choices.

c. What additional considerations are relevant to the Wisconsin Arts decision?

1. The impact on employees
2. Potential customer dissatisfaction with the work done by the outside service
3. Loss of direct control over the quality and timing of the layout work
4. The possibility that future layout rates could grow faster than the cost of internal salaries

Select the relevant consideration(s) from the list above.

Answer 1

Differential Revenue
Residual value		21900
Differential costs
Purchase price
Number of pages	28800
Price per page	-19
Total differential costs		-547200
Cost to perform internally
Salaries	184000
Benefits	53000
Supplies	29000
Office Expenses	20000	286000
Net Differential cost		-261200
Net Benefit of Buy		-239300
The irrelevant costs are 2&3 i.e. Office depreciation and computer depreciation
as these represent sunk costs already incurred
c.Relevant considerations are All 4