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 $0.46 of ingredients, $0.20 of variable overhead (electricity to run the oven), and $0.75 of direct labor for kneading and forming the loaves. Allocating fixed overhead (depreciation on the kitchen equipment and building) based on direct labor assigns $1.06 of fixed overhead per loaf. None of the fixed costs are avoidable. The local bakery would charge Olive Terrace $1.76 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? 1. What is the absorption cost of making the bread in-house? What is the variable cost per loaf? Olive Terrace Outsourcing Decision (Absorption Costing) Variable cost per loaf Full (absorption) cost per loaf