Make or Buy A company manufactures varioussized plastic bott

Make or Buy A company manufactures various-sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is $156 per unit (100 bottles), including fixed costs of $31 per unit. A proposal is offered to purchase small bottles from an outside source for $97 per unit, plus $12 per unit for freight. The area of accounting concerned with the effect of alternative courses of action on revenues and costs. 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 \"o\". Use a minus sign to indicate a loss. Differential Analysis Make Bottles (Alt. 1) or Buy Bottles (Alt. 2) July 31 Make Bottles (Alternative1) Buy Bottles (Alternative 2) Differential Effect on Income (Alternative 2) Sales price 97 97 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.

Solution

Differential Analysis Make bottles Buy bottles Differential effect on income Sales Price 150 150 unit costs: Purchase Price nil 97 -97 Freight nil 12 -12 variable manufacturing cost (156- 31) 125 nil 125 Fixed Factory Overhead cost NA NA NA Incom /(loss) 25 41 16 * Assume: $150 is Sales Price Alternative 2 : Buy the Bottle as it increase the net profit by $16 per Unit