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Make or Buy A restaurant bakes its own bread for a cost of $168 per unit...

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..

Solutions

Expert Solution

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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