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 (Alternative 1) or buy (Alternative 2) the bottles, assuming fixed costs are unaffected by the decision. If an amount is zero, enter "0". Use a minus sign to indicate a loss.

Answer 1

Answer and Explanation:

The preparation of differential analysis is shown below:-

                                 Differential Analysis

                                Make Bottles (Alt 1) or Buy Bottles (Alt 2)

                                             31-July

Particulars  Make Bottles  Buy Bottles  Differential effect on income

                                     (Alt 1)                  (Alt 2)                  (Alt 2)

Sales price                   $0.00                $0.00                    $0.00

Unit Costs:    

Purchase price            $0.00                $40.00                $40.00

Freight                         $0.00                 $4.00                      $4.00

Variable costs             $47.00                 $0.00                -$47.00

($75 per unit -$28 per unit)

Fixed factory overhead $28.00             $28.00                 $0.00

Income (Loss)               -$75.00               -$72.00               $3.00