Garcia 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 $ 150,000 $ 80,000 $ 230,000 Less variable expenses 80,000 46,000 126,000 Contribution margin $ 70,000 $ 34,000 $ 104,000 Less direct fixed expenses* 20,000 38,000 58,000 Segment margin $ 50,000 $ (4,000) $ 46,000 Less common fixed expenses 30,000 Operating income $ 16,000 * Includes depreciation. The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,000 subassemblies are purchased. All units produced are sold, and there are no ending inventories of subassemblies. Garcia 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. Garcia is considering two alternatives to supply the productive capacity for the subassembly. Lease the needed space and equipment at a cost of $27,000 per quarter for the space and $10,000 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 $38,000, $8,000 of which is depreciation on equipment. If the thickness gauge is dropped, sales of the density gauge will not be affected. Required: 1. Should Garcia Company make or buy the subassembly? If it makes the subassembly, which alternative should be chosen? Enter the relevant costs of each alternative. Lease and Make Buy Drop Thickness Gauge and Make Total relevant costs $___ $_ $______

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Garcia 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	$	150,000	$	80,000	$	230,000
Less variable expenses		80,000		46,000		126,000
Contribution margin	$	70,000	$	34,000	$	104,000
Less direct fixed expenses*		20,000		38,000		58,000
Segment margin	$	50,000	$	(4,000)	$	46,000
Less common fixed expenses						30,000
Operating income					$	16,000

* Includes depreciation.

The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,000 subassemblies are purchased. All units produced are sold, and there are no ending inventories of subassemblies. Garcia 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.

Garcia is considering two alternatives to supply the productive capacity for the subassembly.

Lease the needed space and equipment at a cost of $27,000 per quarter for the space and $10,000 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 $38,000, $8,000 of which is depreciation on equipment. If the thickness gauge is dropped, sales of the density gauge will not be affected.

Required:

1. Should Garcia Company make or buy the subassembly?

If it makes the subassembly, which alternative should be chosen?

Enter the relevant costs of each alternative.