what is Drop Thickness Gauge and Make?

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 $ 162,000 86,400 $ 86,400 49,680 $ 248,400 136,080 Less variable expenses Contribution margin $ 75,600 $ 36,720 $ 112,320 Less direct fixed expenses* 41,040 62,640 21,600 $ 54,000 Segment margin $ (4,320) $ 49,680 32,400 Less common fixed expenses Operating income $ 17,280 * Includes depreciation. The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,160 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 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 $29,160 per quarter for the space and $10,800 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 $41,040, $8,640 of which is depreciation on equipment. If the thickness gauge is dropped, sales of the density gauge will not be affected