1. 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		Gold
   Raw materials	$ 70		$130
   Direct labor	27		27
   Variable overhead	8		8
   Fixed overhead	22		22
   Total	$127		$187

   Fixed overhead is detailed as follows:

   Salary (supervisor)	$26,000
   Depreciation	5,000
   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 crownsit will not supply just one type for the price indicated. If the offer is accepted, the equipment used by Hetricks 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:

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

   Make its own crownsPurchase crowns from an external supplier

   What is the dollar effect of purchasing? $fill in the blank 2

   Extra expenditureNet savings

   2. CONCEPTUAL CONNECTION What qualitative factors should Hetrick consider in making this decision?

   1. Quality of crowns

   2. Reliability and promptness of producer

   3. The price of the crowns

   4. Reduction of workforce

   5. Increase in workforce

   6. Increase in fixed cost

   1,2 and 41,2 and 51,2 and 61,2 and 3

   3. Conceptual Connection: Suppose that the lab facility is owned rather than rented and that the $32,000 is depreciation rather than rent. What effect does this have on the analysis in Requirement 1?

   It

   increasesreduces

   the cost of making the crowns to $fill in the blank 6 , which is

   lessmore

   than the cost of buying.4. Conceptual Connection: Refer to the original data. Assume that the volume of crowns used is 4,200 porcelain and 600 gold. Should Hetrick make or buy the crowns?

   BuyMake

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