Question

# A restaurant bakes its own bread for a cost of \$164 per unit (100 loaves), including...

A restaurant bakes its own bread for a cost of \$164 per unit (100 loaves), including fixed costs of \$32 per unit. A proposal is offered to purchase bread from an outside source for \$97 per unit, plus \$8 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 \$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.

Replace Equipment

A machine with a book value of \$245,300 has an estimated six-year life. A proposal is offered to sell the old machine for \$215,500 and replace it with a new machine at a cost of \$283,900. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from \$50,300 to \$40,200.

Prepare a differential analysis dated February 18, on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.

 Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) February 18 Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) Differential Effect on Income (Alternative 2) Revenues: Proceeds from sale of old machine \$ \$ \$ Costs: Purchase price Direct labor (6 years) Income (Loss) \$ \$ \$

Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)?

Ques 1

 Make bread (Alternative 1) Buy bread (Alternative 2) Differential effect on income (Alternative 2) Selling price 0 0 0 Unit Cost: Purchase price 0 97 -97 Delievery 0 8 -8 Variable cost (164 - 32) 132 0 132 Fixed factory overhead 32 32 0 Income/(Loss) -164 -137 27

Ques 2

 Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) Differential Effect on Income (Alternative 2) Revenues: 0 0 0 Proceeds from sale of old machine 0 215,500 215,500 Costs: Purchase price (283,900) (283,900) Direct labor (6years) (50,300 * 6) = 301,800 (40,200 * 6) = (241,200) 60,600 Income/ (Loss) (301,800) (309,600) (7,800)

Company should continue with the old machine.

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