A company manufactures various-sized plastic bottles for its medicinal product.

Question

A company manufactures various-sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is $75 per unit (100 bottles), inluding fixed costs of $28 per unit. A proposal is offered to purchase small bottles from an outside source for $40 per unit, plus $4 per unit for freight. 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.

Explanation / Answer

Answer:- The company should buy the product from outside supplier instead of making it because the cost of buying (ie-$44 per unit) is less than cost of making (ie-47).Hence alternative 2 is better option. Fixed cost are unaffected by decision hence it is a unavoidable cost & should ne ignored.

Company Statement of Comparative cost Manufaturing Amount Purchase from outside Supplier Amount Alternative 1 Per unit $ Alternative 2 Per unit $ Manufacturing cost                47.00 Purchase Cost                     44.00 ($75 per unit -$28 per unit) ($40 per unit +$4 per unit for freight) Fixed costs NIL Total Manufaturing cost                47.00 Total Purchase cost                     44.00

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