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 $19 per layout page. The budget for the Publication Department for the current year is as follows: Salaries $288,400 Benefits 65,600 Supplies 35,000 Office expenses 43,700 Office depreciation 39,300 Computer depreciation 26,200 $498,200 Total The department expects to lay out 23,000 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.

Answer 1

Solution a:

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	-$4,37,000	-$4,37,000
Salaries	-$2,88,400	$0	$2,88,400
Benefits	-$65,600	$0	$65,600
Supplies	-$35,000	$0	$35,000
Office expenses	-$43,700	$0	$43,700
Office depreciation	-$39,300	-$39,300	$0
Computer depreciation	-$26,200	-$26,200	$0
Income (loss)	-$4,98,200	-$5,02,500	-$4,300

Solution b:

The benefit from using an outside service is shown to be less than performing the lay out 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 lay off the five employees, the guild should consider the long-run impact of the decision.

1 2 3 Differential Analysis 4 5 Lay out Pages Internally (Alt. 1) or Purchase Lay out Services (Alt. 2) 6 Feb-22 Differential Effect on Purchase Lay out Lay out Pages Internally (Alternative 1) 7 Services (Alternative 2) Income (Alternative 2) $0 Selling Price $0 $0 8 Costs: 9 Purchase price of lay out work Salaries Benefits Supplies Office expenses Office depreciation Computer depreciation Income (loss) $0 $288,400 $65,600 $437,000 $0 $0 -$437,000 10 $288,400 11 $65,600 12 $35,000 $0 $35,000 13 $43,700 $0 $43,700 14 $39,300 $39,300 $0 15 $26,200 $26,200 $0 16 $498,200 $4,300 -$502,500 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 Sheet923 Sheet924 Sheet925 Sheet926 Sheet