Reference no: EM132540919

Make or Buy, Qualitative Considerations

Hetrick Dentistry Services operates in a large metropolitan area. Currently, Hetrick has its own dental laboratory to produce porcelain and gold crowns. The unit costs to produce the crowns are as follows:

Porcelain

Raw materials $ 70

Direct labor 27

Variable overhead 8

Fixed overhead 22

Total $127

Gold

Raw materials $130

Direct labor 27

Variable Overhead 8

Fixed overhead 22

Total $187

Fixed overhead is detailed as follows:

Salary (supervisor) $26,000

Depreciation5,000

Rent (lab facility) 32,000

• Overhead is applied on the basis of direct labor hours. These rates were computed by using 5,500 direct labor hours.

• A local dental laboratory has offered to supply Hetrick all the crowns it needs. Its price is $125 for porcelain crowns and $150 for gold crowns; however, the offer is conditional on supplying both types of crowns-it will not supply just one type for the price indicated. If the offer is accepted, the equipment used by Hetrick's laboratory would be scrapped (it is old and has no market value), and the lab facility would be closed. Hetrick uses 2,000 porcelain crowns and 600 gold crowns per year.

Required:

Question 1. Conceptual Connection: Should Hetrick continue to make its own crowns, or should they be purchased from the external supplier?

Question 2. What is the dollar effect of purchasing?