Problem 8-57. Make or Buy, Qualitative Considerations Oblecuve1 2 Hetrick Dentistry Services operates in a large metropolitan area. Currently, Hetrick has its own dental laboratory to produce porcelain and gold crowns. The unit costs to produce the crowns are as follows: Porcelain Gold Raw materials 5 7 $130 Direct labor 27 27 Variable overhead 8 8 Fixed overhead i E Total g g Fixed overhead is detailed as follows: Salary (supervisor) $26,000 Depreciation 5,000 Rent (lab facility) 32,000 Overhead is applied on the basis of di- rect labor hours. These rates were com- puted by using 5,500 direct labor hours. A local dental laboratory has offered to supply Hetrick all the crowns it needs. Its price is $125 for porcelain crowns and $150 for gold crowns; however, the offer is conditional on supplying both types of crownsit will not supply just one type for the price indicated. If the offer is ac- cepted, the equipment used by Hetrick's laboratory would be scrapped (it is old and has no market value), and the lab fa- cility would be closed. Hetrick uses 2,000 porcelain crowns and 600 gold crowns per year. Required: 1. Conceptual Connection Should Hetrick continue to make its own crowns, or should they be pur- chased from the external supplier? What is the dollar effect of purchasing? Answer i Check Figure: Cost to make = $367,000 2. Conceptual Connection What qualitative factors should Hetrick consider in making this decision? 3. Conceptual Connection Suppose that the lab facility is owned rather than rented and that the $32,000 is depreciation rather than rent. What effect does this have on the analysis in Requirement 1? 4. Conceptual Connection Refer to the original data. Assume that the volume of crowns used is 4,200 porcelain and 600 gold. Should Hetrick make or buy the crowns? Explain the outcome. Answer i Check Figure: Cost to make = $598,000