Powell Dentistry Services operates in a large metropolitan area. Currently, Powell has its own dental laboratory to produce porcelain and gold crowns. The unit costs to produce the crowns are as follows:
Porcelain Gold
| Direct materials | $ 80 | $165 |
| Direct labor | 27 | 27 |
| Variable overhead | 8 | 8 |
| Fixed overhead | 22 | 22 |
| Total | $137 | $222 |
Fixed overhead is detailed as follows:
| Salary (supervisor) | $26,000 |
| Depreciation | 5,000 |
| Rent (lab facility) | 32,000 |
Overhead is applied on the basis of direct labor hours. These rates were computed using 5,500 direct labor hours.
A local dental laboratory has offered to supply Powell all the crowns it needs. Its price is $130 for porcelain crowns and $200 for gold crowns; however, the offer is conditional on supplying both types of crowns—it will not supply just one type for the price indicated. If the offer is accepted, the equipment used by Powell’s labora- tory would be scrapped (it is old and has no market value), and the lab facility would be closed. Powell uses 3,000 porcelain crowns and 800 gold crowns per year.
Required
1. Should Powell continue to make its own crowns, or should they be purchased from the external supplier? What is the dollar effect of purchasing?
2. What qualitative factors should Powell consider in making this decision?
3. Suppose that the lab facility is owned rather than rented and that the $32,000 is depreciation rather than rent. What effect does this have on the analysis in Requirement 1?
4. Refer to the original data. Assume that the volume of crowns used is 4,000 porce- lain and 600 gold. Should Powell make or buy the crowns? Explain the outcome.
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