Tom opened a food catering service in downtown Vancouver two years ago. The place is essentially made up of a sit-down area with service and a daily menu for lunch and dinner while the back of the place is mainly for catering service. Tom is contemplating some important business decisions for the catering service and came to you for assistance in determining what costs are relevant to making these decisions. SITUATION 1 - MAKE OR BUY A PRODUCT Tom has been approached by Fast Bakery and they indicated that they could bake all the 150 loaf breads he needs daily for a cost of $1.15 per loaf bread. tom is considering this offer as load bread are very time consuming. They take on average 3 hours of his time to make each morning. He feels that he could use this time to make some pies and quiche that can be sold during the lunch. Fast Bakery has provided the cost sheet below: Offer from Fast Bakery: To bake 150 loaf bread each day at $1.15 per unit. A daily delivery charge of $40 would be applied. Any change to the quantity ordered needs to be communicated at least 48 hours in advance. A change in the order quantity would result in a $15 administrative charge. The current terms are valid for 1 year, at which point the contract can be renegotiated. The current direct material of making each loaf is $0.95. The variable costs associated with the croissants are estimated at 10 cents per loaf. Tom is not paid on an hourly basis, so cutting the loaf line would not affect the salary expense. Tom also indicated that the loaf use a special oven which Tom believes that he could make 25 pies with the time he would save by no longer making loaf. On average, the pies would provide a profit of $3.5 per pie. Tom is very excited about this opportunity as he feels that making pies allows him to be much more creative than making loaf. REQUIRED: 1. Identify the relevant costs to the make or buy decision of the loaf. Prepare a computation to identify the gain/loss that would result from outsourcing the loaf production to Fast Bakery. 2. What qualitative factors would you consider in this decision?