Question

Make or Buy

A company manufactures various-sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is $152 per unit (100 bottles), including fixed costs of $31 per unit. A proposal is offered to purchase small bottles from an outside source for $100 per unit, plus $9 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.

Differential Analysis
Make Bottles (Alt. 1) or Buy Bottles (Alt. 2)
July 31
	Make Bottles (Alternative 1)	Buy Bottles (Alternative 2)	Differential Effect on Income (Alternative 2)
Sales price	$	$	$
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.

Answer 1

a
Differential Analysis
Make Bottles (Alt. 1) or Buy Bottles (Alt. 2)
July 31
	Make Bottles (Alternative 1)	Buy Bottles (Alternative 2)	Differential Effect on Income (Alternative 2)
Sales price	0	0	0
Unit costs:
Purchase price	0	100	-100
Freight	0	9	-9
Variable costs	121	0	121
Fixed factory overhead	31	31	0
Income (Loss)	-152	-140	12
b
The company should Buy (Alternative 2) the bottles