Problem 17.31 (Algorithmic) 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	$	165,000	$	88,000	$	253,000
Less variable expenses		88,000		50,600		138,600
Contribution margin	$	77,000	$	37,400	$	114,400
Less direct fixed expenses*		22,000		41,800		63,800
Segment margin	$	55,000	$	(4,400)	$	50,600
Less common fixed expenses						33,000
Operating income					$	17,600
* Includes depreciation.

The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,200 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 $29,700 per quarter for the space and $11,000 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 $41,800, $8,800 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? - Select your answer -Buy the subassemblyMake the subassemblyItem 1

If it makes the subassembly, which alternative should be chosen? - Select your answer -Drop the density gaugeDrop the thickness gaugeItem 2

Enter the relevant costs of each alternative.

	Lease and Make	Buy	Drop Thickness Gauge and Make
Total relevant costs	$	$	$