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 $9.50 per layout page. The budget for the Publication Department is as follows:

Salaries	$185,000
Benefits	50,000
Supplies	30,000
Office expenses	25,000
Office depreciation	70,000
Computer depreciation	18,000
Total	$378,000

The department expects to lay out 30,000 pages. The computers used by the department have an estimated residual value of $6,500. 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
ANSWER IS ONE OR THE OTHER: Cost increase from purchasing outside layout services Cost savings from purchasing outside layout services		$
ANSWER IS ONE OR THE OTHER: Net differential income from using an outside service Net differential loss from using an outside service		$

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. ANSWER CAN BE ONE OF THESE:

• 1 only
• 1, 2, and 3
• 2 and 3 only
• 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.

ANSWER CAN BE ONE OF THESE:

• 1 only
• 1, 2, and 3
• 2 and 3 only
• 3 only
• 1, 2, 3 and 4