Make-or-Buy, Traditional Analysis Morrill Company produces two different types of gauges: a density gauge and a thickness gauge. The segmented income statement for a typical quarter follows. Density Thickness Gauge Gauge Total Sales $ 148,500 $ 79,200 $ 227,700 Less variable expenses 79,200 45,540 124,740 $ 69,300 $ 33,660 $ 102,960 19,800 37,620 57,420 Contribution margin Less direct fixed expenses* Segment margin Less common fixed expenses Operating income $ 49,500 $ (3,960) $ 45,540 29,700 $ 15,840 Includes depreciation. The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 1,980 subassemblies are purchased. All units produced are sold, and there are no ending inventories of subassemblies. Morrill is considering making the subassembly rather than buying it. Unit-level variable manufacturing costs are as follows: Direct materials $2 Direct labor 3 Unit-level variable manufacturing costs are as follows: $2 Direct materials Direct labor 3 Variable overhead 2 No significant non-unit-level costs are incurred. Morrill is considering two alternatives to supply the productive capacity for the subassembly. 1. Lease the needed space and equipment at a cost of $26,730 per quarter for the space and $9,900 per quarter for a supervisor. There are no other fixed expenses. 2. 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 $37,620, $7,920 of which is depreciation on equipment. If the thickness gauge is dropped, sales of the density gauge will not be affected. Required: 1. Should Morrill 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 50,490 49,500