Friday, November 9, 2018

The Theater Arts Guild of Dallas (TAG-D) employs five people in its Publication Department

The Theater Arts Guild of Dallas (TAG-D) employs five people in its Publication Department. These people lay out pages for pamphlets, brochures, magazines, and other publications for the TAG-D productions. The pages are delivered to an outside company
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. 


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