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

Question

3. A company manufactures various-sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is $75 per unit (100 bottles), including 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

If company make insteed of by, they will incure a loss of $300

Make Buy Differential effect on income Variable Manufacturing cost 100*($75-$28) = $4,700 $                                                (4,700) Fixed Manufacturing cost 100*$28 = $2,800 100*$28 = $2,800 $                                                           - Purchase cost 100*$40 = $4,000 $                                                  4,000 Freight charge 100*$4 = $400 $                                                      400 Total Cost $                                   7,500 $                        7,200 $                                                   (300)

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