A restaurant bakes its own bread for $152 per unit (100 loaves), including fixed costs of $39 per unit. A proposal is offered to purchase bread

A restaurant bakes its own bread for $152 per unit (100 loaves), including fixed costs of $39 per unit. A proposal is offered to purchase bread from an outside source for $105 per unit, plus $12 per unit for delivery. Prepare a differential analysis dated August 16, 2014, to determine whether the company should make (Alternative 1) or buy (Alternative  2) the bread, assuming fixed costs are unaffected by the decision.

Answer:

Differential Analysis 

Make Bread (Alt. 1) or Buy Bread (Alt. 2) 

August 16, 2014 

 

 

Make Bread 

(Alternative 1) 

Unit costs:    

Purchase price $ 0 –$105 –$105 

Delivery 0 –12 –12 

Variable costs ($152 – $39) –113 0 113 

Fixed factory overhead –39 –39 0 

Income (Loss) –$152 –$156 –$ 4 

    

The company should make the bread.