for printing. The company is considering an outside publication service for the layout work. The outside service is quoting a price of $13 per layout page. The budget for the Publication Department for 2014 is as follows:
Salaries $224,000
Benefits 36,000
Supplies 21,000
Office expenses 39,000
Office depreciation 28,000
Computer depreciation 24,000
Total $372,000
The department expects to lay out 25,000 pages for 2014. The computers used by the department have an estimated residual value of $9,000. The Publication Department office space and equipment would be used for future administrative needs, if the department’s function were purchased from the outside.
a. Prepare a differential analysis dated February 22, 2014, to determine whether TAG-D should lay out pages internally (Alternative 1) or purchase layout services from the outside (Alternative 2).
b. On the basis of your analysis in part (a), should the page layout work be purchased from an outside company?
c. What additional considerations might factor into the decision making?
Answer:
a.
Differential Analysis
Lay Out Pages Internally (Alt. 1) or Purchase Layout Services (Alt. 2)
February 22, 2014
Lay Out
Pages
Internally
(Alternative 1)
Revenues:
Salvage of computer equipment $ 0 $ 9,000 $ 9,000
Costs:
Purchase price of layout work 0 –325,000* –325,000
Salaries –224,000 0 224,000
Benefits –36,000 0 36,000
Supplies –21,000 0 21,000
Office expenses –39,000 0 39,000
Office depreciation –28,000 –28,000 0
Computer depreciation –24,000 –24,000 0
Income (Loss) –$372,000 –$368,000 $ 4,000
* 25,000 pages × $13 per page
b. The benefit from using an outside service is shown to be $4,000 greater than
performing the layout work internally. The fixed costs (depreciation
expenses) in the budget are irrelevant to the decision. Thus, the work should
be purchased from the outside on a strictly financial basis.
c. Before electing to terminate the five employees, the guild should consider
the long-run impact of the decision. Specifically, future page layout rates
may grow faster than the cost of internal salaries, thus favoring the use of
employees over the long term. This would especially be the case if the
outside company provided a low bid in order to win the initial business. In
addition, the guild may wish to consider noneconomic factors, such as the
ability to more directly control the quality and timing of the layout work by
internal employees.