Question

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.

a. Prepare a differential analysis dated July 31 to determine whether the company should make _______ or buy __________ the bottles, assuming fixed costs are unaffected by the decision.
b. Determine whether the company should make ___________ or buy ________ the bottles.

Answer 1

Part a

Differential analysis to determine whether the company should make or buy the bottles.

Make Buy

Variable manufacturing costs ($75 - $28) $47

Purchase price $40

Freight charges $4

Total Cost $47 $44

Part b

The Company should Buy instead of making the bottles. This is because it costs $3 more to make the bottles than buying them.

Step-by-step explanation:

The make or buy decision should be done by considering relevant costs. The fixed costs are irrelevant in this decision hence, we have to ignore them.

The alternative course which gives the lowest cost is the one to go for. This will minimize the costs for the entire business and in turn maximizes the profits of the company.