Question

a)

Make or Buy A restaurant bakes its own bread for a cost of $140 per unit (300 loaves), including fixed costs of $33 per unit. A proposal is offered to purchase bread from an outside source for $97 per unit, plus $8 per unt for delivery Prepare a dilferential 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 booxes in which you must enter subtracted or negative numbers use a minus sign Defferential Analysis Make Bread (Alt. 1) or Buy Bread (Alt. 2) July 7 Buy Bread (Alternative 1) (Alternative 2) Differential Efect on Income Make Bread (Alternative 2) Sales prce Unit Costs 50 50 Purchase price Delivery Variable costs Fxed factory overhead Income (Loss)

b)

c)

d)

Answer 1

a. Make or Buy :

Differential Analysis Make Bread ( Alt. 1 ) or Buy Bread ( Alt. 2 ) July 7
	Make Bread	Buy Bread	Differential Effect on Income
	Alt. 1	Alt. 2	Alt. 2
Sales Price	$ 0	$ 0	$ 0
Unit Cost
Purchase price		97	- 97
Delivery		8	- 8
Variable cost	107		107
Fixed factory overhead	33	33	0
Income ( loss )	$ 140	$ 138	$ 2

As the total cost to make exceeds the total relevant cost to buy, the company should buy the bread from the outside supplier.

b. Replace Equipment:

Differential Analysis Continue with Old Machine ( Alt 1 ) or Replace Old Machine ( Alt 2) October 3
	Continue with Old Machine	Replace Old Machine	Differential Effect on Income
	Alternative 1	Alternative 2	Alternative 2
Revenues
Proceeds from Sale of Old Machine	$ 0	$ 217,800	$ 217,800
Costs
Purchase Price	0	- 282,900	- 282,900
Direct labor	- 303,000	- 242,400	60,600
Income ( loss )	- $ 303,000	- $ 307,500	- $ 4,500

As the net effect on Income is a negative $ 4,500 for Alternative 2, the company should continue with the old machine.

c. Process or Sell :

Differential Analysis
	Sell Product A	Process Further into Product B	Differential Effect on Income
	Alternative 1	Alternative 2	Alternative 2
Revenue per unit	$ 4.02	$ 4.30	$ 0.28
Cost per unit	- 3.34	- 3.82	- 0.48
Income ( loss ) per unit	$ 0.68	$ 0.48	- $ 0.20

Product A should not be further processed into Product B, as the differential effect on income is negative.

d. Accept business at special price:

Differential Analysis Reject Order ( Alt. 1 ) or Accept Order ( Alt. 2 ) March 16
	Reject Order	Accept Order	Differential Effect on Income
	Alt. 1	Alt. 2	Alt. 2
Revenue per Unit	0	$ 30	$ 30
Costs
Variable manufacturing cost	0	- 26	- 26
Export Tariff	0	- 3.60	- 3.60
Income ( loss) per Unit	$ 0	$ 0.40	$ 0.40

As the business has idle capacity to take on the export order, and since the order results in additional income of $ 0.40 per unit, the export order should be taken up.