Question
Suppose an an Olive Avenue OliveAvenue restaurant is considering whether to(1) bake bread for its restaurantin-house or(2) buy the bread from a local bakery. The
Suppose an
an Olive Avenue
OliveAvenue restaurant is considering whether to(1) bake bread for its restaurantin-house or(2) buy the bread from a local bakery. The chef estimates that variable costs of making each loaf include $ 0.50
$0.50 ofingredients, $ 0.20
$0.20 of variable overhead(electricity to run theoven), and $ 0.75
$0.75 of direct labor for kneading and forming the loaves. Allocating fixed overhead(depreciation on the kitchen equipment andbuilding) based on direct labor assigns $ 1.02
$1.02 of fixed overhead per loaf. None of the fixed costs are avoidable. The local bakery would charge Olive Avenue
OliveAvenue $ 1.74
$1.74 per loaf.
1. What is the absorption cost of making the breadin-house? What is the variable cost perloaf?
2. Should Olive Avenue
OliveAvenue bake the breadin-house or buy from the localbakery? Why?
3. In addition to the financialanalysis, what else should Olive Avenue
OliveAvenue consider when making thisdecision?
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