Make or Buy A restaurant bakes its own bread for a cost of $164 per unit (100 lo

Question

Make or Buy

A restaurant bakes its own bread for a cost of $164 per unit (100 loaves), including fixed costs of $33 per unit. A proposal is offered to purchase bread from an outside source for $99 per unit, plus $11 per unit for delivery.

Prepare a differential analysis dated August 16, to determine whether the company should make (Alternative 1) or buy (Alternative 2) the bread, assuming fixed costs are unaffected by the decision. If an amount is zero, enter zero "0".

Differential Analysis Make Bread (Alt. 1) or Buy Bread (Alt. 2) August 16 Make Bread (Alternative 1) Buy Bread (Alternative 2) Differential Effect on Income (Alternative 2) Selling Price $ $ $ Unit Costs: Purchase price $ $ $ Delivery Variable costs Fixed factory overhead Income (Loss) $ $ $

Explanation / Answer

Answer: Particular Make Bread Buy Bread Difference Alternative 1 Alternative 2 Effect on income (Alternate 2) Increase/(Decrease) ($) ($) ($) Cost of production of bread 164 0 Less: Fixed Cost 33 0 Cost of bread per unit   (A) 131 0 Purchase price per unit of bread 0 99 Add: Delivery charge per unit 0 11 Total cost of purchase   (B) 0 110 Net cost of bread per unit 131 110 21 (A+B) * Restaurant should puchase the bread from outside source. It will increase in profit by $21.

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