Question

Make or Buy

A restaurant bakes its own bread for a cost of $148 per unit (100 loaves), including fixed costs of $31 per unit. A proposal is offered to purchase bread from an outside source for $95 per unit, plus $12 per unit for delivery.

Prepare a differential analysis dated July 7 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the bread, assuming that fixed costs are unaffected by the decision. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Make Bread (Alt. 1) or Buy Bread (Alt. 2)
July 7
	Make Bread (Alternative 1)	Buy Bread (Alternative 2)	Differential Effect on Income (Alternative 2)
Sales price	$0	$0	$0
Unit Costs:
Purchase price	$	$	$
Delivery
Variable costs
Fixed factory overhead
Income (Loss)	$	$	$

Determine whether the company should make (Alternative 1) or buy (Alternative 2) the bread.

Answer 1

Solution:

Differential Analysis
Make Bread (Alt 1) or buy bread (Alt 2)
Jul-07
Particulars	Make Bread (Alt 1)	Buy Bread (Alt 2)	Differential Effect on income (Alt 2)
Sales Price	$0.00	$0.00	$0.00
Unit Costs:
Purchase Price	$0.00	-$95.00	-$95.00
Delivery	$0.00	-$12.00	-$12.00
Variable costs	-$117.00	$0.00	$117.00
Fixed Factory Overhead	-$31.00	-$31.00	$0.00
Income / (Loss)	-$148.00	-$138.00	$10.00

The company should buy the bread as income will increase by $10 per unit.