Question

III) A) The Sirap Co. manufactures plastic bottles for its medicinal products. The manufacturing cost is $67 per batch of 100 bottles. This includes fixed costs of $22 per batch. A proposal is received to purchase the bottles from an outside source for $35 per batch, plus freight charges at $5 per batch. Prepare a differential analysis to show in good form if Sirap Co. should continue making the bottles, Alterative One or choose Alternative Two buying from an outside supplier. Note that Fixed Costs are unaffected. Production is at 80 Percent of capacity. e bottles from an out to show in good form if Siesarom an outside supplie Zeon at $9.60 155.00 per inco is operatiu B) The Sirap Co. usually sells product Zeon at $9.60 per unit. A special price of $7.20 is offered for the export market. The Variable production cost is $5.00 per unit. An additional export tariff of 15% of revenue will be charged for all export products. Sirap Co. is operating at 85% of capacity. Prepare a differential analysis schedule in good form to becide if the special proposal should be rejected, Alternative One, or accepted Alternative Two. C) Accept business at a special price: Product Sirap is normally sold for $6.50 per unit. A special price of $5.60 is offered for the export market. The variable production cost is $4.50 per unit. An additional export tariff of 25% of revenue must be paid for all export products. Determine the differential income or loss per unit form selling Sirap for export.

Answer 1

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The Sirap Co.
Answer III A
Total cost of 1 batch	67.00
Fixed cost of 1 batch	22.00
Variable cost of 1 batch	45.00
Incremental Analysis	Make	Buy
Variable cost of 1 batch	45.00
Purchase price of 1 batch		35.00
Add: Freight charges		5.00
Total relevant cost of 1 batch	45.00	40.00
Gain per batch from buying		5.00
The Sirap Co. will save $ 5 per batch if it buys from external supplier.
Fixed costs are sunk costs and will not be considered here.

Answer III B
The Sirap Co. is operating at 85% capacity only. It means it has spare capacity of 15%. So it should accept export only if it is able to cover the variable cost atleast.
	Current	Special offer
Sell Price	9.60	7.20
Variable cost	5.00	5.00
Export tariff		1.08
Total Variable cost	5.00	6.08
Contribution per unit	4.60	1.12
The Sirap Co. will earn contribution of $ 1.12 per unit if its exports. So it should utilize its spare capacity of 15% to exports.

Answer III C	Current	Special offer
Sell Price	6.50	5.60
Variable cost	4.50	4.50
Export tariff		1.40
Total Variable cost	4.50	5.90
Contribution per unit	2.00	(0.30)
The Sirap Co. will loss of $ 0.30 per unit if it exports. So it should not export.