QUESTION:

Andrea Inc. bakes cakes for her many restaurants. Normal production is 3,200 cakes per year.

Andrea Inc. has been approached by Guido Ltd. who offered to make the cakes for $24.00 per unit. If Andrea Inc. outsources the production of the cakes, she can rent the space she is now using for $6,000 per year, bringing in additional income.

None of the fixed costs would be eliminated if Andrea Inc. outsourced the production of the cakes.

The following cost information is available:

Direct materials	$8.00
Direct labour	$7.50
Variable overhead	$6.50
Fixed overhead	$4.00
Total	$26.00

Fixed overhead is allocated to the cost of the product using normal production.

Using the above information answer the following questions.

If Andrea Inc. decides to buy the cakes from Guido Ltd. would their operating income increase or decrease?

Enter the letter A for increase.

Enter the letter B for decrease.

By how much will operating income increase or decrease by if Andrea Inc. purchased the cakes from Guido Ltd.?

Enter your answer as a positive number.

Should Andrea Inc. make or buy the cakes?

Enter the letter A for make.

Enter the letter B for buy.