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 $ $192,000$ $ $102,400$ $ $294,400$

Less variable expenses $102,40058,880161,280$

Contribution margin $ $89,600$ $ $43,520$ $ $133,120$

Less direct fixed expenses$*25,60048,64074,240$

Segment margin $ $64,000$ $ $(5,120)$ $ $58,880$

Less common fixed expenses $38,400$

Operating income $ $20,480$

$*$ Includes depreciation.

The density gauge uses a subassembly that is purchased from an external supplier for $$25$ per unit. Each quarter, $2,560$ 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 $$34,560$ per quarter for the space and $$12,800$ 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 $$48,640,$ $$10,240$ 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?

Make the subassembly

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

Drop 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 $3$

$65,280$

$fill in the blank $4$

$64,000$

$fill in the blank $5$

$38,400\mathrm{.}00$

$2.$ Suppose that dropping the thickness gauge will decrease sales of the density gauge by $10$ percent. What decision should now be made?

Keep the thickness gauge and buy the subassembly

$3.$ Assume that dropping the thickness gauge decreases sales of the density gauge by $10$ percent and that $3,584$ subassemblies are required per quarter. As before, assume that there are no ending inventories of subassemblies and that all units produced are sold. Assume also that the per$-$unit sales price and variable costs are the same as in Requirement $1.$ Include the leasing alternative in your consideration. Now, what is the correct decision?

Lease the space and make the subassembly

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$1.$ Relevant costs $($and revenues$)$ are future costs $($and revenues$)$ that differ across alternatives. For each cost and revenue given, ask yourself if the company would incur different amounts of the costs, in total, for each alternative. Set up the analysis with the relevant costs and revenues organized under a column heading for each alternative.

$2$ & $3.$ Review what you have learned in the