Gray Dentistry Services is part of an HMO that operates in a large metropolitan area. Currently, Gray has its own dental

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Gray Dentistry Services is part of an HMO that operates in a
large metropolitan area. Currently, Gray has its own dental
laboratory to produce porcelain and gold crowns. The unit costs to
produce the crowns are as follows:
Fixed overhead is detailed as follows:
Overhead is applied on the basis of direct labor hours. The
rates above were computed using 5,500 direct labor hours.
A local dental laboratory has offered to supply Gray all the
crowns it needs. Its price is $100 for porcelain crowns and $132
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
Gray’s laboratory would be scrapped (it is old and has no market
value), and the lab facility would be closed. Gray uses 1,500
porcelain crowns and 1,000 gold crowns per year.
Requirements:
Part 1. Should Gray continue to make its own crowns, or should
they be purchased from the external
supplier? What is the dollar effect of purchasing?
Part 2. What qualitative factors should Gray consider in making
this decision? By considering these
qualitative factors, will you amend your answer in Requirement 1?
Why?
Part 3. Suppose that the lab facility is owned rather than rented
and that the $20,000 is depreciation
rather than rent. What effect does this have on the analysis in
Requirement 1?