Question

Make or Buy A company manufactures various-sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is $164 per unit (100 bottles), including fixed costs of $32 per unit. A proposal is offered to purchase small bottles from an outside source for $100 per unit, plus $7 per unit for freight. a. Prepare a differential analysis dated July 31 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the bottles, assuming fixed costs are unaffected by the decision. If an amount is zero, enter"0". Use a minus sign to indicate a loss. Differential Analysis Make Bottles (Alt. 1) or Buy Bottles (Alt. 2) July 31 Make Bottles (Alternative 1) Buy Bottles (Alternative 2) Differential Effect on Income (Alternative 2) Sales price Unit costs: Purchase price Freight Variable costs Fixed factory overhead Income (Loss) b. Determine whether the company should make (Alternative 1) or buy (Alternative 2) the bottles.

Answer 1

SOLUTION

A.

	Make bottles (Alternative 1)	Buy bottles (Alternative 2)	Differential effect on income ((Alternative 2)
Sale price	0	0	0
Units costs:
Purchase price	0	100	-100
Freight	0	7	-7
Variable costs ($164-$32)	132	0	132
Fixed factory overhead	32	32	0
Income / (Loss)	164	139	25

B. Company should buy the bottles.