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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Make-or-buy decision for a service company

The Theater Arts Guild of Dailus (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 513 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.

  1. a. Prepare a differential analysis dated February 22 to determine whether TAG-D should lay out pages internally (Alternative D or purchase layout services from the outside (Alternative 2).
  2. b. On the basis of your analysis in part (a), should the page layout work be purchased from an outside company? Explain.
  3. c. What additional considerations might factor into the decision making?

a)

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business

To Prepare: The differential analysis of Company TAG-D as on February 22, for given alternatives.

Explanation

The differential analysis of Company TAG-D as on February 22, for given alternatives is shown below.

Differential Analysis of Company TAG-D
Lay out pages internally (Alt. 1) or Purchase Layout Services (Alt. 2)
February 22
Lay out pages internally  (Alternative 1) Purchase Layout Services (Alternative 2) Differential effect on income
Sales price $0 $0 $0
Unit Costs:
   Purchase price of layout work $0 (1)  (-)  $312,000 (-)  $312,000
   Salaries (-)  $224,000 $0 (-)  $224,000
   Benefits (-)  $36,000 $0 (-)  $36,000
   Supplies (-)  $21,000 $0 (-)  $21,000
   Office Expenses (-)&...

b)

To determine

To Explain: Whether the Company TAG-D as on February 22, based on the differential analysis purchase the layout services.

c)

To determine

To Enlist: The other factors to be considered before taking the final decision.

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