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) | $ | $ | $ |
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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