Suppose an Olive Terrace restaurant is considering whether to (1) bake bread for its restaurant in-house or (2) buy the bread from a local bakery. The chef estimates that variable costs of making each loaf include $0.50 of ingredients, $0.25 of variable overhead (electricity to run the oven), and $0.78 of direct labor for kneading and forming the loaves. Allocating fixed overhead (depreciation on the kitchen equipment and building) based on direct labor assigns $1.04 of fixed overhead per loaf. None of the fixed costs are avoidable. The local bakery would charge Olive Terrace $1.72 per loaf. 1. What is the absorption cost of making the bread in-house? What is the variable cost per loaf? 2. Should Olive Terrace bake the bread in-house or buy from the local bakery? Why? 3. In addition to the financial analysis, what else should Olive Terrace consider when making this decision? Olive Terrace Outsourcing Decision (Absorption Costing) Direct material 0.50 Direct labor .70 Variable overhead Variable cost per loaf Fixed overhead per loaf Full (absorption) cost per loaf 2. Should Olive Terrace bake the bread in-house or buy from the local bakery? Why? 2. Should Olive Terrace bake the bread in-house or buy from the local bakery? Why? Decision: since the the cost of outsourcing each loaf. 3. In addition to the financial analysis, what else should Olive Terrace consider when making this decision? Olive Terrace should consider the following qualitative factors before making a final decision: O A. Will the local bakery meet their delivery time requirements? OB. If labor and oven time were not devoted to breadmaking, could another more profitable product be made in its place? O c. How does the quality and freshness of the local bakery bread compare to Olive Terrace bread? OD. All of the above O E. None of the above