QUESTION:

David Inc., a generous boss, supplies coffee for all his employees every day. He has an option to buy coffee at Natasha's Coffee Shop (his great sister!) or continue to brew the coffee on site.

Natasha's Coffee Shop has offered to supply the coffees to David Inc. for $2.10 per cup.

Currently David Inc. has the following costs with regards to making the coffee on site:

Annual production	3,600	cups
Production costs per cup:
Direct materials	$1.00
Direct labour	$0.75
Variable overhead	$0.25
Fixed overhead	$0.30
Total	$2.30

Fixed overhead is allocated to each cup of coffee based on the annual production.

Of the total fixed overhead costs, $700 is a direct fixed overhead cost which will not be incurred if the company purchases the coffee from Natasha's Coffee Shop. The remaining fixed overhead costs are common fixed overheads costs and therefore unavoidable.

There is no alternative use for the area currently being used to make the coffee on site.

Using the above information answer the following questions.

If David Inc. decides to buy coffee from Natasha's Coffee Shop. would David's 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 David Inc. buys the coffee from Natasha's Coffee Shop?

Enter your answer as a positive number.

Should David Inc. continue to make or buy the coffee?

Enter the letter A for make.

Enter the letter B for buy.