In: Accounting
Make or Buy A restaurant bakes its own bread for a cost of $168 per unit (100 loaves), including fixed costs of $31 per unit. A proposal is offered to purchase bread from an outside source for $98 per unit, plus $10 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..
Make or Buy differential analysis
Alternative 1 (Make bread internally) |
Alternative (Buy bread from outside supplier) |
|
Variable cost: | ||
Making cost of bread internally cost per unit | 168 | |
Purchasing (buying) cost of bread per unit | 98 | |
Delivery charges for buying the bread per unit | 10 | |
Total relevant cost | 168 | 108 |
Total relevant cost of making the bread internally include only making cost of bread $168.
Total relevant cost of buying the bread include purchase cost of bread $98 per unit and delivery cost of bread $10. The total relevant cost of buying the bread is $108
Fixed cost $31 is irrelevant in this make or buy decision of bread, because fixed cost is incurred if the company buy or make the product.
If make the bread the company need to spend $168 per unit.
If buying the bread from outside supplier, the company need to spend a total cost of $108 per unit. $108 include purchase cost $98 per unit and delivery cost $10 per unit.
Company making cost is greater than the purchasing cost. It means buying the bread is profitable to the company.
Profit = buying cost of break - making cost
Profit = 168 - 108 = $60
The analysis show that buying the bread from outside supplier is profitable to the company by $60.
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