Question

Make or Buy A restaurant bakes its own bread for a cost of $164 per unit (100 loaves), including fixed costs of $32 per unit. A proposal is offered to purchase bread from an outside source for $105 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 "O". 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 Buy Bread Differential Effect (Alternative 1) (Alternative 2) on Income (Alternative 2) $0 $0 $0 Sales price 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 (alt 1) or buy bread (alt 2)
July 7
	Make bread (Alternative 1)	Buy bread (Alternative 2)	Differential effect on income (Alternative 2)
Sales	$0	$0	$0
(-)!Unit cost :
Purchase price	$0	$105	-$105
Delivery	$0	$10	-$10
Variable cost	$132	$0	$132
Fixed factory overhead	$32	$32	$0
Income/(loss)	-$164	-$147	$17

The company should buy the bread (alternative 2).

If the company buys the bread then the net income increases by $17. This is because, the total cost reduces by $17 ($164 - $105 - $10 - $32). This also can be understood in the other way, if the company makes breads then net loss is $164 and if it buys the it is $147, so net loss reduces by $17 which is increase in income.

Note : calculations of variable cost -

Variable cost = total cost - fixed cost

= $164 - $32

= $132