Question

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)?

Answer 1

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

The company should buy the bread. (alternative 2)

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.