Sentences 1 and 3 are grammatically correct; Sentence 2 is grammatically wrong.
In Sentence 1, “Bread and butter is my favorite breakfast,” the use of the singular form “is” despite its having “bread and butter” as an apparently plural subject is an exception to the usual subject-verb agreement rule. This is because “bread and butter” belongs to the category of compound expressions whose component nouns have become so inseparable in usage as to be taken as a single unit, thus making them notionally singular and allowing the verb to take the singular form. As I explained in the chapter on “Nouns and Verbs in Conflict” in my book English Plain and Simple, “bread and butter” is idiomatically a singular subject in the same way as the phrase “the long and short of it” in this sentence: “The long and short of it is that we have already discussed subject-verb agreement enough and must now stop.”
In Sentence 2, “Bread and butter is sold in the grocery store,” the nouns “bread” and “butter” are being used normally in the sense of two separate entities added together as a compound subject, so the use of the singular form “is” is grammatically incorrect. That verb should be in the plural form “are” instead: “Bread and butter are sold in the grocery store.” This corrected version is, of course, the same as Sentence 3.
