Case Study 1: Make-or-Buy Analysis
“In my opinion, we ought to stop making our dinner rolls and accept that outside
supplier’s offer,” said Mary, managing partner at Wuksachi Restaurant. “At a price of
15 cents per dinner roll, we would be paying 50 cents less than it costs us to bake
the bread in-house. Since we use 150,000 rolls a year, that would be an annual cost
savings of $75,000.” Wuksachi’s actual cost to prepare these dinner rolls is shown
below (based on 150,000 dinner rolls per year):
A decision about whether to make or buy the bread is especially important at this
time, since the oven used to make the bread is completely worn out and must be
replaced. The choices facing the restaurant are as follows:
Alternative 1: Purchase a new baking oven and continue to make the rolls. The
oven would cost $18,000; it would have ten years of useful life and no salvage
value.
Alternative 2: Purchase the dinner rolls from an outside supplier at 15 cents per
roll under a one-year contract.
The new baking oven would be more efficient than the oven that Wuksachi Restaurant
has been using and, according to the manufacturer, would reduce direct labor and
variable overhead costs by 20 percent. The restaurant would use the space now being used to produce the rolls for storage and an additional refrigerator.
Your task:
1. To assist the director in the making a decision, prepare an analysis showing
what the total cost and the cost per dinner roll would be under each of the two
alternatives given above. Assume that 150,000 dinner rolls are needed each
year. Which course of action would you recommend to the director?
Direct material $20,500
Direct labor $36,200
Variable overhead $20,800
Fixed overhead ($2.80 general company overhead,
$1.60 depreciation, and $0.75 supervision)
$20,000
Total cost per roll $0.65
Ojugo, Clement (2009-03-31). Practical Food and Beverage Cost Control (Page 111). Cengage Textbook. Kindle Edition.
0 comments