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?