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Make-or-Buy, Traditional Analysis

Garcia Company produces two different types of gauges: a density gauge and a thickness gauge. The segmented income statement for a typical quarter follows.

	Density Gauge		Thickness Gauge		Total
Sales	$	163,500	$	87,200	$	250,700
Less variable expenses		87,200		50,140		137,340
Contribution margin	$	76,300	$	37,060	$	113,360
Less direct fixed expenses*		21,800		41,420		63,220
Segment margin	$	54,500	$	(4,360)	$	50,140
Less common fixed expenses						32,700
Operating income					$	17,440
* Includes depreciation.

The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,180 subassemblies are purchased. All units produced are sold, and there are no ending inventories of subassemblies. Garcia is considering making the subassembly rather than buying it. Unit-level variable manufacturing costs are as follows:

Direct materials	$2
Direct labor	3
Variable overhead	2

No significant non-unit-level costs are incurred.

Garcia is considering two alternatives to supply the productive capacity for the subassembly.

Lease the needed space and equipment at a cost of $29,430 per quarter for the space and $10,900 per quarter for a supervisor. There are no other fixed expenses.

Drop the thickness gauge. The equipment could be adapted with virtually no cost and the existing space utilized to produce the subassembly. The direct fixed expenses, including supervision, would be $41,420, $8,720 of which is depreciation on equipment. If the thickness gauge is dropped, sales of the density gauge will not be affected.

Required:

1. Should Garcia Company make or buy the subassembly?

Buy the subassemblyMake the subassemblyMake the subassembly

If it makes the subassembly, which alternative should be chosen?

Drop the density gaugeDrop the thickness gaugeDrop the thickness gauge

Enter the relevant costs of each alternative.

	Lease and Make	Buy	Drop Thickness Gauge and Make
Total relevant costs	$fill in the blank 3	$fill in the blank 4	$fill in the blank 5