Question

Make or Buy

A restaurant bakes its own bread for a cost of $160 per unit (100 loaves), including fixed costs of $37 per unit. A proposal is offered to purchase bread from an outside source for $98 per unit, plus $7 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

	Differential Analysis
	Make Bread (Alt1) or Buy Bread (Alt 2)
	Jul-07
		Make Bread	Buy Bread	Differential Effect on Income
		Alternative 1	Alternative 2	Alternative 2
	Sales Price	-	-	-
	Unit Costs:
	Purchase Price		98.0	-98.0
	Delivery		7.0	-7.0
	Variable Costs	123.0	-	123.0
	Fixed F Overhead	-	-	-
	Income (Loss)	-123.0	-105.0	-18.0
	Company Should choose Alternative 2 having lower cost
Note:	Fixed Cost is Sunk cost for the decision