Question

A company manufactures various-sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is $75 per unit (100 bottles), inluding 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. 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.

Answer 1

Answer:- The company should buy the product from outside supplier instead of making it because the cost of buying (ie-$44 per unit) is less than cost of making (ie-47).Hence alternative 2 is better option. Fixed cost are unaffected by decision hence it is a unavoidable cost & should ne ignored.

Company
Statement of Comparative cost
Manufaturing	Amount	Purchase from outside Supplier	Amount
Alternative 1	Per unit $	Alternative 2	Per unit $
Manufacturing cost	47.00	Purchase Cost	44.00
($75 per unit -$28 per unit)		($40 per unit +$4 per unit for freight)
Fixed costs	NIL
Total Manufaturing cost	47.00	Total Purchase cost	44.00