Maximizing Profit: Make or Buy Decision Analysis

How can Perfume Corp. benefit from making their own bottles instead of buying them?

A. By reducing variable costs

B. By increasing fixed costs

C. By optimizing production efficiency

D. By decreasing total production cost

Answer:

Perfume Corp. will benefit by $1,000 by making the bottles instead of buying them.

Perfume Corp. is currently faced with the decision of whether to produce their own bottles or buy them from a manufacturer. The company incurs a fixed cost of $175,000 and a variable cost of $2 for each bottle produced. The manufacturer offers to sell bottles to Perfume Corp. at $6 each, and Perfume needs 68,750 bottles.

To determine the benefit of making the bottles instead of buying them, we need to compare the total cost of producing the bottles to the cost of purchasing them. The total cost of producing 68,750 bottles is calculated as follows:

Total Cost = Fixed Cost + (Variable Cost per unit * Quantity)

Total Cost = $175,000 + ($2 * 68,750) = $413,500

If Perfume were to buy the bottles, the cost would be:

Cost of Buying = Cost per unit * Quantity = $6 * 68,750 = $412,500

By subtracting the cost of buying from the total cost of producing, we get the benefit of making the bottles instead of buying them:

Benefit = Total Cost of Producing - Cost of Buying = $413,500 - $412,500 = $1,000

Therefore, Perfume Corp. will benefit by $1,000 by making the bottles instead of buying them. This decision allows the company to save on costs and maximize their profit margin.