Make or Buy A company manufactures various-sized plastic bottles for its medicin

Question

Make or Buy

A company manufactures various-sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is $148 per unit (100 bottles), including fixed costs of $35 per unit. A proposal is offered to purchase small bottles from an outside source for $97 per unit, plus $10 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.

b. Determine whether the company should make (Alternative 1) or buy (Alternative 2) the bottles.

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) $ $ $

Explanation / Answer

Differential Analysis Make Bottles (Alt. 1) or Buy Bottles (Alt. 2) Jul-31 Make Bottles (Alternative 1) Buy Bottles (Alternative 2) Differential Effect on Income (Alternative 2) Sales price 0.00 0.00 0.00 Unit costs: Purchase price 113.00 97.00 16.00 Freight 10.00 -10.00 Variable costs 113.00 107.00 6.00 (Since Fixed Cost is unaffected, It has no impact on Decision Making) Fixed factory overhead 0.00 0.00 0.00 Income (Loss) -113.00 -107.00 6.00 Company should Buy Bottles since it is giving Rs. 6 incremental benefit against making

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