Question

A company manufactures various-sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is $50 per unit (100 bottles), including fixed costs of $17 per unit. A proposal is offered to purchase small bottles from an outside source for $37 per unit, plus $4 per unit for freight. This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below. Open spreadsheet Prepare a differential analysis dated January 25 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". Enter unit costs as positive values. Use a minus sign to indicate negative Differential Effects. Differential Analysis Make Bottles (Alt. 1) or Buy Bottles (Alt. 2) January 25 Make Bottles (Alternative 1) Buy Bottles (Alternative 2) Differential Effects (Alternative 2) Unit costs: Purchase price $ $ $ Freight Variable costs Fixed factory overhead Total unit costs $ $ $ Determine whether the company should make (Alternative 1) or buy (Alternative 2) the bottles.

Answer 1

Answer:

a. $(8000)

b. Company should choose alternative 1 and make bottles.

Explanation:

Particulars               Make Bottles            Buy Bottles  Differential

                                Alternative 1             Alternative 2

Purchase Price                  0                       $37                               $(37)

Freight Charges                 0                       $4                                $(4)

Variable cost                    $33                                                          $33

Fixed Cost                        $17                     $17                                  0

Cost per unit                    $50                    $58                              $(8)

Income / (Loss)                 $50,000            $58,000                      $(8,000)

b. The company should choose alternative 1 and make bottles. The buying of bottles will cost company loss of $8,000.