Question

Make or Buy

A restaurant bakes its own bread for a cost of $160 per unit (100 loaves), including fixed costs of $35 per unit. A proposal is offered to purchase bread from an outside source for $104 per unit, plus $12 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.

Answer 1

	Make Bread (Alternative 1)	Buy Bread (Alternative 2)	Differential Effect on Income (Alternative 2)
Selling Price	$0	$0	$0
Unit Costs:
Purchase price ($104 * 100)	$0	10,400	(10,400)
Delivery ($12 * 100)	$0	1,200	(1,200)
Variable costs ($160 - $35) * 100	12,500	$0	12,500
Fixed factory overhead ($35* 100)	3,500	3,500	0
Income (Loss)	$16,000	$15,100	$900

Conclusion : The company should buy (Alternative 2) the bread , as buying bread will save $900 in total cost