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 $ 204,000 108,800 Thickness Gauge $108,800 62,560 Sales Total $312,800 171,360 Less variable expenses Contribution margin Less direct fixed expenses $ 95,200 27,200 $ 68,000 $ 46,240 51,680 $ (5,440) $ 141,440 78,880 $ 62,560 Segment margin Less common fixed expenses 40,800 Operating income $ 21,760 * Includes depreciation. The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,720 subassemblies are purchased. All units produced are sold, and there are no ending Inventories of subassemblles. Morril is considering making the subassembly rather than buying it. Unit-level variable manufacturing costs are as follows: Direct materials Direct labor Variable overhead 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 $36,720 per quarter for the space and $13,600 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 $51,680, $10,880 of which is depreciation on equipment. If the thickness gauge is dropped, sales of the density gauge will not be affected. Required: 1. Should Marrill Company make or buy the subassembly? If It makes the subassembly, which alternative should be chosen? Enter the relevant costs of each alternative. Lease and Make Buy Drop Thickness Gauge and Make Total relevant costs