6-33 Make or Buy at Nantucket Nectars

1. Assume that Nantucket Nectars reports the following costs to make 17.5 oz bottles for its juice cocktails:

Nantucket Nectars Company

Cost of making 17.5-ounce bottles

	Total cost for 1,000,000 Bottles	Cost per Bottle
Direct materials	$ 80,000	$ .80
Direct Labor	30,000	.30
Variable Factory Overhead	60,000	.60
Fixed factory overhead	85,000	.85
Total costs	$255,000	$2.55

Another manufacturer offers to sell Nantucket Nectars the bottles for $.25. The capacity now used to make bottles will become idle if the company purchases the bottles. Further, one supervisor with a salary of $60,000, a fixed cost, would be eliminated if the bottles were purchased. Prepare a schedule that compares the costs to make and buy the 17.5 oz bottles. Should Nantucket make or buy the bottles?

2. Refer to the preceding exercise. Suppose Nantucket Nectars can use the released facilities in another manufacturing activity that makes a contribution to profits of $75,000 or can rent them out for $55,000. Prepare a schedule that compares the four alternative courses of action. Which would yield the lowest net cost?