Exhibit 17.1

Morrill Company produces two different types of gauges: a density

gauge and a thickness gauge. The segmented income statement for

a typical quarter follows.

 

 

 

 

 

 

 

 

The density gauge uses a subassembly that is purchased from an

external supplier for $25 per unit. Each quarter, 2,960 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. Unitlevel

variable manufacturing

costs are as follows:

Direct materials $2

Direct labor 3

Variable overhead 2

No significant nonunitlevel

costs are incurred.

Morrill is considering two alternatives to supply the productive capacity

for the subassembly.

1. Lease the needed space and equipment at a cost of $39,960 per

quarter for the space and $14,800 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 $56,240, $11,840 of which is depreciation on equipment. If the

thickness gauge is dropped, sales of the density gauge will not be

affected.

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