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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Make or buy

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 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the bottles, assuming that fixed costs are unaffected by the decision.

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.

To Determine: Whether to produce its own bottle or purchase bottle.

Explanation

A company has two alternatives to either produce the bottle or to purchase the bottle. If the restaurant produces the bottle it involves a cost of $67, and if the bottle is purchased the company involves a cost of $62, as the fixed costs of $22, remain the same and are unaffected.

Working Note:

Calculate the variable cost involved in the production of the bread...

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