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 $15 per layout page. The budget for the Publication Department for the current year is as follows: Salaries $207,900 Benefits 47,300 Supplies 25,200 Office expenses 31,500 Office depreciation 28,400 Computer depreciation 18,900 $359,200 Total The department expects to lay out 21,000 pages for the current year. The Publication Department office space and equipment would be used for future administrative needs, it 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", For those boxes in which you must enter subtracted or negative numbers use a minus sign

Answer 1

1) a) Differential Analysis for Lay out pages internally or purchase lay out service (Amounts in $)

Differential Analysis
Lay Out Pages Internally (Alt. 1) or Purchase Lay Out Services (Alt. 2)
February 22
	Lay Out Pages Internally (Alt 1)	Purchase Lay Out Services (Alt. 2)	Differential Effect on Income (Alt 2)
Selling Price	0	0	0
Less Costs:
Purchase price of lay out work	0	315,000 (21,000*$15)	315,000
Salaries	207,900	0	(207,900)
Benefits	47,300	0	(47,300)
Supplies	25,200	0	(25,200)
Office Expenses	31,500	0	(31,500)
Office depreciation	28,400	28,400	0
Computer Depreciation	18,900	18,900	0
Total costs	359,200	362,300	3,100
Income (Loss)	(359,200)	(362,300)	(3,100)

As there is a loss of $3,100 in purchasing lay out service, the company should lay out pages internally.

(Office depreciation and computer depreciation will remain same and not change).

2) Differential analysis for lease or buy is shown as follows:- (Amounts in $)

Differential Analysis
Lease Equipment (Alt. 1) or Buy Equipment (Alt. 2)
December 3
	Lease Equipment (Alt 1)	Buy Equipment (Alt. 2)	Differential Effect on Income (Alt 2)
Revenues	0	0	0
Less Costs:
Purchase price	0	3,360	3,360
Freight and Installation	0	660	660
Repair and maintenance (4 yrs)	0	1,600 (400*4)	1,600
Lease (4 yrs)	6,320 (1,580*4)	0	(6,320)
Total costs	6,320	5,620	(700)
Income (Loss)	(6,320)	(5,620)	700

As there is a decrease in cost from $6,320 to $5,620, the company should buy the equipment.