Question

Make-or-Buy Decision Wisconsin Arts of Milwaukee employs five people in its Publication Department. These people lay...

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 $22 per layout page. The budget for the Publication Department is as follows:

Salaries $190,000
Benefits 51,000
Supplies 32,000
Office expenses 24,000
Office depreciation 69,300
Computer depreciation 46,200
Total $412,500

The department expects to lay out 35,000 pages. The computers used by the department have an estimated residual value of $30,800. 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
Cost increase from purchasing outside layout services $
Net differential loss from using an outside service $

Feedback

a. Follow Exhibit 8 in the text. For the make alternative, add the variable and fixed costs. For the buy alternative, add the purchase price and the fixed costs. Determine the differential effect on revenues, costs, and income (loss).

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.
2 and 3 only

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.
1, 2, 3 and 4

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