Hetrick Dentistry Services operates in a large metropolitan area. Currently, Hetrick has its own dental laboratory to produce porcelain and gold crowns. The unit costs to produce the crowns are as follows:

Porcelain

Gold

Direct materials

R700

R1 300

Direct labour

R270

R270

Variable overhead

R80

R80

Fixed overhead

R220

R220

Total

R1 270

R1 870

Fixed overhead is detailed as follows:

Salary ( supervisor) R260 000

Direct depreciation R50 000

Rent (lab facility) R320 000

Overhead is applied on the basis of direct labour hours. These rates were calculated by using 5 500 direct labour hours.

A local dental laboratory has offered to supply Hetrick all the crowns it needs. Its price is R1 250 for porcelain crowns and R1 500 for gold crowns, however, the offer is conditional on supplying both types of crowns - thus they will not supply only one type for the price indicated. If the offer is accepted, the equipment used by Hetrick's laboratory would be scrapped (it is old and has no market value), and the lab facility would be closed. Hetrick uses 2 000 porcelain crowns and 600 gold crowns annually.

Required:

a. Should Hetrick make or buy the crowns? Show calculations.

b. What qualitative factors should Hetrick consider in making the decision?

c. Suppose the lab facility is owned rather than rented and that the R320 000 is depreciation rather than rent. How would this affect your answer in a. above? Show calculations