Question

Asbtar Company manufactures various-sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is SAR 65 per unit (100 bottles), including fixed costs of SAR 14 per unit. A proposal is offered to purchase small bottles from an outside source for SAR 42 per unit, plus SAR 3 per unit for freight. Prepare a differential analysis to determine whether the company should make (Alternative 1) or buy (Alternative 2) for bottles, assuming fixed costs are not affected by the decision.

Answer 1

	Alternative 1 (Make)	Alternative 2 (Buy)
Variable Manufacturing Cost per Unit (SAR) (*)	51	0
Purchase price per Unit	0	42
Freight Cost per Unit (SAR)	0	3
Total Cost per Unit (SAR)	51	45
Total Cost for 100 units (SAR)	5100	4500
(*) Manufaturing Cost of SAR 65 includes fixed cost of SAR 14 , hence variable manufacturing cost is SAR (65 - 14) = SAR 51
Company should buy small bottles as Cost is SAR 4500 / 100 bottles in case of buy as compared to SAR 5100/ 100 bottles in case of manufacturing the bottles