11.13.14

A company manufactures various-sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is $57 per unit (100 bottles), including fixed costs of $17 per unit. A proposal is offered to purchase small bottles from an outside source for $30 per unit, plus $4 per unit for freight.

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. If an amount is zero, enter "0". Enter unit costs as positive values. Use a minus sign to indicate negative Differential Effects.

Differential Analysis
Make Bottles (Alt. 1) or Buy Bottles (Alt. 2)
January 25
		Make Bottles (Alternative 1)		Buy Bottles (Alternative 2)		Differential Effects (Alternative 2)
Unit costs:
Purchase price		$___		$___		$___
Freight		__		___		___
Variable costs		___		___		___
Fixed factory overhead		__		___		___
Total unit costs		$___		$___		$__

A machine with a book value of $85,000 has an estimated five-year life. A proposal is offered to sell the old machine for $47,500 and replace it with a new machine at a cost of $65,000. The new machine has a five-year life with no residual value. The new machine would reduce annual direct labor costs from $11,800 to $7,800.

Prepare a differential analysis dated April 11 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). If an amount is zero, enter "0". Use a minus sign to indicate costs, losses, or negative differential effect on income.

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
April 11
		Continue with Old Machine (Alternative 1)		Replace Old Machine (Alternative 2)		Differential Effects (Alternative 2)
Revenues:
Proceeds from sale of old machine		$___		$___		$___
Costs:
Purchase price		___		___		___
Direct labor (5 years)		___		___		___
Profit (Loss)		$___		$___		$___