BELAIR BISTRO Belair Bistro is a French bistro located in Toronto. The Bistro is essentially made up of a sit-down area with service and a daily menu for lunch and dinner while the front of the bistro is a take-out bakery and cafe. The manager of the Bistro, Mr. Gabriel, is contemplating some important business decisions for the bistro and came to you for assistance in determining what costs are relevant to making these decisions. SITUATION - MAKE OR BUY A PRODUCT Pierre, the pastry chef of Belair Bistro indicates that he has been approached by Le Louvre Bakery. Le Louvre indicated that they could bake all the 150 croissants the caf needs daily for a cost of $1,15 per croissant. Pierre is considering this offer as croissants 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 cakes that can be sold at the cafe. Pierre has summarized the information from the offer below: Offer from Le Louvre: - To bake 150 croissants 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 materials of making the croissants is $0.95. The variable costs associated with the croissants are estimated at 10 cents per croissant. Pierre is not paid on an hourly basis, so cutting the croissant line would not affect the salary expense. Pierre believes that he could make 25 pies with the time he would save by no longer making croissants. On average, the pies would provide a contribution margin of $3.5 per pie. Plerre is very excited about this opportunity as he feels that making pies allows him to be much more creative than making croissants. Pierre also indicated that the croissants use a special oven that could be sold as it would no longer be needed. The oven was purchased six years ago for $8,500. However, as there is not a large re-sale market for used bakery stoves, Plerre estimates that they could only get $2,500 if they sold it today. REQUIRED: 1. Identify the relevant costs to the make or buy decision of the croissants. Prepare a computation to identify the gain / loss that would result from outsourcing the croissant production to Le Louvre. 2. What qualitative factors would you consider in this decision
