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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Make or buy

A restaurant bakes its own bread for a cost of $230 per unit (100 loaves), including fixed costs of $47 per unit. A proposal is offered to purchase bread from an outside source for $180 per unit, plus $18 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.

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.

To Determine: Whether to produce its own bread or purchase bread.

Explanation

A restaurant has two alternatives to either produce the bread or to purchase the bread. If the restaurant produces the bread it involves a cost of $230, and if the bread is purchased the company involves a cost of $245, as the fixed costs of $47, remain the same and are unaffected.

Working Note:

Calculate the variable cost involved in the production of the bread...

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