Discontinuing a Department; Make or Buy (CPA) The Ace Publishing Company in Hong Kong is in the business of publishing and printing guidebooks and directories. The board of directors has engaged you to make a cost study to determine whether the company is economically justified in continuing to print, as well as publish, its books and directories. You obtain the following information from the company’s cost-accounting records for the preceding fiscal year:

DEPARTMENTS PUBLISHING PRINTING SHIPPING TOTAL Salaries and wages $275,000 $150,000 $25,000 $ 450,000 Telephone and telegraph 12,000 3,700 300 16,000 Materials and supplies 50,000 250,000 10,000 310,000 Occupancy costs 75,000 80,000 10,000 165,000 General and administrative 40,000 30,000 4,000 74,000 Depreciation 5,000 40,000 5,000 50,000 $457,000 $553,700 $54,300 $1,065,000 Additional Data 1. A review of personnel requirements indicates that if printing is discontinued, the publishing department will need one additional clerk at $4,000 per year to handle correspondence with the printer. Two layout men and a proofreader will be required, at an aggregate annual cost of $17,000; other personnel in the printing department can be released. One mailing clerk, at $3,000, will be retained; others in the shipping department can be released. Employees whose employment was being terminated would immediately receive, on the.average, three months’ termination pay. litre termination pay would be amortized over a five-year period.
. Long-distance telephone and telegraph charges are identified and distributed to the responsible department. The remainder of the telephone bill, representing basic service at a cost of $4,000, is allocated in the ratio of 10 to publishing, 5 to printing, and 1 to shipping. The discontinuance of printing is not expected to have a material effect on the basic service cost.
. Shipping supplies consist of cartons, envelopes, and stamps. It is estimated that the cost of envelopes and stamps for mailing material to an outside printer would be $5,000 per year.
. If printing were discontinued, the company would retain its present building but would sublet a portion of the space at an annual rental of $50,000.
Taxes, insurance, heat, light, and other occupancy costs would not be significantly affected.
. One cost clerk would not be required ($5,000 per year) if printing is discontinued. Other general and administrative personnel would be retained.
. Included in administrative expenses is interest expense on a 5 percent mortgage loan of $500,000.
. Printing and shipping-room machinery and equipment having a net book value of $300,000 can be sold without gain or loss. These funds in excess of termination pay would be invested in marketable securities earning 5 percent.
. The company has received a proposal for a five-year contract from an outside printer, under which the volume of work done last year would be printed at a cost of $550,000 per year.
Assume continued volume and prices at last year’s level.
Prepare a statement setting forth in comparative form the costs of operation of the printing and shipping departments under the present arrangement and under an arrangement in which inside printing is discontinued. Summarize the net saving or extra cost in case printing is discontinued. lop5