Tom opened a food catering service in downtown Vancouver two years ago. The place consists of a sit-down area with service and a daily menu for lunch and dinner, while the back is mainly for catering service. Tom is contemplating some important business decisions for the catering service and seeks assistance in determining the relevant costs for these decisions.

**Situation 1 - Make or Buy a Product**

Tom has been approached by Fast Bakery, which offers to bake all the 150 loaves of bread he needs daily for $1.15 per loaf. Tom is considering this offer because baking bread is time-consuming, taking an average of 3 hours each morning. He feels he could use this time to make pies and quiche to sell during lunch. Fast Bakery has provided the following cost sheet:

- Offer from Fast Bakery:
- To bake 150 loaves of bread each day at $1.15 per unit.
- A daily delivery charge of $40.
- Any change to the quantity ordered needs to be communicated at least 48 hours in advance, resulting in a $15 administrative charge.
- The current terms are valid for 1 year, after which the contract can be renegotiated.

The current direct material cost of making each loaf is $0.95. The variable costs associated with the loaves 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 he uses a special oven for the loaves, and he believes he could make 25 pies with the time saved by no longer making loaves. On average, the pies would provide a profit of $3.50 per pie. Tom is excited about this opportunity as he feels making pies allows him to be more creative than making loaves.

**Required:**

1. Identify the relevant costs for the make or buy decision of the loaves. Prepare a computation to identify the gain/loss resulting from outsourcing the loaf production to Fast Bakery.

2. What qualitative factors would you consider in this decision?