A company manufactures various-sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is $55 per unit (100 bottles), including fixed costs of $12 per unit. A proposal is offered to purchase small bottles from an outside source for $36 per unit, plus $3 per unit for freight. Required:
Prepare a differential analysis dated January 25 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the bottles, assuming fixed costs are unaffected by the decision.

Differential Analysis on January 25:

                                        Make                Buy           Difference

                                  Alternative 1   Alternative 2

Avoidable costs                 $43               $39                 $4

per unit of (100 bottles)

Explanation:

a) Data and Calculations:

Variable manufacturing cost per unit = $43 ($55 - $12)

Fixed manufacturing cost per unit =         12

Total manufacturing cost per unit =      $55

Outside supplier's offered price per unit = $36

Freight per unit for outside supply =               3

Total outside supply cost per unit =            $39

b) There is an additional avoidable cost of $4 per unit to make the bottles.  From a financial point of view, it will be cost-effective to buy the bottles from the outside supplier.  If the company finds an alternative use of the production facilities, the cost difference will increase.

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