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 Gauge Thickness Gauge Total Sales $ 148,500 $ 79,200 $ 227,700 Less variable expenses 79,200 45,540 124,740 Contribution margin $ 69,300 $ 33,660 $ 102,960 Less direct fixed expenses* 19,800 37,620 57,420 Segment margin $ 49,500 $ (3,960) $ 45,540 Less common fixed expenses 29,700 Operating income $ 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 Variable overhead 2 No significant non-unit-level costs are incurred. Morrill is considering two alternatives to supply the productive capacity for the subassembly. 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. 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 $fill in the blank 3 $fill in the blank 4 $fill in the blank 5 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 2,772 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

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 Gauge Thickness Gauge Total Sales $ 148,500 $ 79,200 $ 227,700 Less variable expenses 79,200 45,540 124,740 Contribution margin $ 69,300 $ 33,660 $ 102,960 19,800 37,620 57,420 Less direct fixed expenses* Segment margin Less common fixed expenses $ 49,500 $ (3,960) $ 45,540 29,700 Operating income $ 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: 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 I 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 $ 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 2,772 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 Feedback Check My Work 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