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 $ 163,500 $ 87,200 $ 250,700 Less variable expenses 87,200 50,140 137,340 Contribution margin $ 76,300 $ 37,060 $ 113,360 Less direct fixed expenses* 21,800 41,420 63,220 Segment margin $ 54,500 $ (4,360) $ 50,140 Less common fixed expenses 32,700 Operating income $ 17,440 * Includes depreciation. The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,180 subassemblies are purchased. All units produc 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
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 $ 163,500 $ 87,200 $ 250,700 Less variable expenses 87,200 50,140 137,340 Contribution margin $ 76,300 $ 37,060 $ 113,360 Less direct fixed expenses* 21,800 41,420 63,220 Segment margin $ 54,500 $ (4,360) $ 50,140 Less common fixed expenses 32,700 Operating income $ 17,440 * Includes depreciation. The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,180 subassemblies are purchased. All units produc 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
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
100%
![1. Lease the needed space and equipment at a cost of $29,430 per quarter for the space and $10,900 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 $41,420, $8,720 of which is depreciation on equipment. If the thickness gauge is dropped, sales of the density gauge wi
not be affected.
Required:
1. Should Morrll Company make or buy the subassembly?
Make the subassembly
If it makes the subassembly, which alternative should be chosen?
Drop the thickness gauge
Enter the relevant costs of each alternative.
Lease and Make
Buy
Drop Thickness Gauge and Make
Total relevant costs
55,590
54,500
47,960 x
2. Suppose that dropping the thickness gauge will decrease sales of the density gauge by 10 percent. What decision should now be made?
Keep the thickness gauge and buy the subassembly
3. Assume that dropping the thickness gauge decreases sales of the density gauge by 10 percent and that 3,052 subassemblies are required per quarter. As before,
assume that there are no ending inventories of subassemblies and that all units produced are sold. Assume also that the per-unit sales price and variable costs are the
same as in Requirement
Include the leasing alternative in your consider
ion. Now, what is the correct decision?
Lease the space and make the subassembly](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F89863f3a-48c6-478a-b2a9-46c7beb09074%2F6b8041e1-007b-4e06-b1cc-f5d941cfc988%2Fobr7bwg_processed.jpeg&w=3840&q=75)
Transcribed Image Text:1. Lease the needed space and equipment at a cost of $29,430 per quarter for the space and $10,900 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 $41,420, $8,720 of which is depreciation on equipment. If the thickness gauge is dropped, sales of the density gauge wi
not be affected.
Required:
1. Should Morrll Company make or buy the subassembly?
Make the subassembly
If it makes the subassembly, which alternative should be chosen?
Drop the thickness gauge
Enter the relevant costs of each alternative.
Lease and Make
Buy
Drop Thickness Gauge and Make
Total relevant costs
55,590
54,500
47,960 x
2. Suppose that dropping the thickness gauge will decrease sales of the density gauge by 10 percent. What decision should now be made?
Keep the thickness gauge and buy the subassembly
3. Assume that dropping the thickness gauge decreases sales of the density gauge by 10 percent and that 3,052 subassemblies are required per quarter. As before,
assume that there are no ending inventories of subassemblies and that all units produced are sold. Assume also that the per-unit sales price and variable costs are the
same as in Requirement
Include the leasing alternative in your consider
ion. Now, what is the correct decision?
Lease the space and make the subassembly
![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
$ 163,500
$ 87,200
$ 250,700
Less variable expenses
87,200
50,140
137,340
Contribution margin
$ 76,300
$ 37,060
$ 113,360
Less direct fixed expenses*
21,800
41,420
63,220
Segment margin
$ 54,500
$ (4,360)
$ 50,140
Less common fixed expenses
32,700
Operating income
$ 17,440
* Includes depreciation.
The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,180 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
3
Variable overhead](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F89863f3a-48c6-478a-b2a9-46c7beb09074%2F6b8041e1-007b-4e06-b1cc-f5d941cfc988%2F3xhmvnw_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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
$ 163,500
$ 87,200
$ 250,700
Less variable expenses
87,200
50,140
137,340
Contribution margin
$ 76,300
$ 37,060
$ 113,360
Less direct fixed expenses*
21,800
41,420
63,220
Segment margin
$ 54,500
$ (4,360)
$ 50,140
Less common fixed expenses
32,700
Operating income
$ 17,440
* Includes depreciation.
The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,180 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
3
Variable overhead
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