A company manufactures various sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is $67 per unit

A company manufactures various sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is $67 per unit (100 bottles), including fixed costs of $22 per unit. A proposal is offered to purchase small bottles from an outside source for $35 per unit, plus $5 per unit for freight. Prepare a differential analysis dated March 30, 2014, to determine whether the company should make (Alternative 1) or buy (Alternative 2) the bottles, assuming fixed costs are unaffected by the decision.

Answer:

Differential Analysis 

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

March 30, 2014 

Make 

Bottles 

(Alternative 1) 

Unit costs:    

Purchase price $  0 –$35 –$35 

Freight 0 –5 –5 

Variable costs ($67 – $22) –45 0 45 

Fixed factory overhead –22 –22 0 

Income (Loss) –$67 –$62 $  5 

    

The company should buy the bottles.