1.Soda Bottling, Inc., currently bottles its own soda drinks. Management is interested in outsourcing the production of bottles to a reputable manufacturing company that can supply the bottles for $0.04 each. Soda Bottling incurs the following monthly production costs to produce 1,000,000 bottles internally.

Cost per unit

Total monthly cost at 1,000,000 units

Variable production cost

$0.02

$20,000

Fixed production cost

$25,000

Total production cost

$45,000

If production is outsourced, all variable production costs and 70 percent of fixed production costs will be eliminated.

a)Perform differential analysis for the outsourcing decision. Follow the format presented in Figure 6.2 "Make-or-Buy Differential Analysis for Best Boards, Inc.".

b)Which alternative is best? Explain.

c)Assume all the facts of this problem remain the same. However, management of Soda Bottling has an opportunity to lease the space it currently uses to produce bottles for $6,000 per month if production of bottles is outsourced. Follow the format presented in Figure 6.2 "Make-or-Buy Differential Analysis for Best Boards, Inc.". to determine if Soda Bottling would be better off outsourcing production. (Hint: $6,000 will appear in the analysis as an opportunity cost.)

Identify at least one qualitative factor that should be considered before management decides to outsource production.