Suppose Bourbon House 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 $0.62 of ingredients, $0.24 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, Bourbon House assigns $0.95 of fixed overhead per loaf. None of the fixed costs are avoidable. The local bakery would charge $1.80 per loaf. Read the requirements Requirements 1. What is the unit cost of making the bread in-house? Complete the following outsourcing decision analysis to determine Bourbon House's unit cost of making the bread. Bourbon House Outsourcing Decision Direct material Direct labor Variable overhead Variable cost per unit Plus: Fixed overhead per unit Cost per unit 0 Requirements 1. What is the full product unit cost of making the bread in-house? 2. Should Bourbon House bake the bread in-house or buy from the local bakery? Why? 3. In addition to the financial analysis, what else should Bourbon House consider when making this decision? Print Done ter any number in the edit fields and then click Check Answer. he oven and SO 78 of direct lahor for kneading and forming the IAVAE Am Help Me Solve This Question Help Suppose Bourbon House 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 $0.62 of ingredients, $0.24 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, Bourbon House assigns $0.95 of fixed overhead per loaf. None of the fixed costs are avoidable. The local bakery would charge $1.80 per loaf. Read the requirements Requirement 1. What is the unit cost of making the bread in-house? The goal is to minimize costs and maximize profits. The decision process involves comparing the relevant costs to make the item in-house with the relevant costs to outsource the item. Complete the following outsourcing decision analysis to determine Pasta's unit cost of making the bread using absorption costing. Begin by referring to the information provided and calculating the variable cost per loaf of bread baked in-house. Pasta Outsourcing Decision Direct material $ 0.46 Direct labor 0.70 Variable overhead Variable cost per unit 1.35 Now we can enter the fixed costs and calculate the cost of baking each loaf. 1 0.19 Pasta 0.46 $ Pasta Outsourcing Decision Direct material Direct labor 0.70 Variable overhead 0.19 Variable cost per unit 1.35 Plus: Fixed overhead per unit 1.06 $ 2.41 Cost per unit Requirement 2. Should Pasta bake the bread in-house or buy from the local bakery? Why? Use the following decision rule to determine whether Pasta should bake the bread in-house or buy from the local bakery. The decision rule is: I Outsource if the differential costs of making the item are more than the differential costs of outsourcing (buying) the item. Make the item (do not outsource) if the differential costs of making the item are less than the differential costs of Make the item (do not outsource) if the differential costs of making the item are less than the differential costs of outsourcing (buying) the item. Remember, the fixed overhead cost assigned to each loaf of bread made in-house is unavoidable, even if the company ends up outsourcing the bread-making to the local bakery. Therefore, this portion of the full cost per unit to make the bread is not relevant. The differential cost (the relevant cost) to make the bread in-house is the variable cost per loaf, $1.35. Compare this amount with the cost per loaf to buy the bread from the local bakery, $1.72. Based on this information, should Pasta make or buy the bread? As with the other decisions, managers want to know if outsourcing is more expensive than producing in-house. The goal is to minimize costs and maximize profits. The decision process involves comparing the relevant costs to make the item in-house with the relevant costs to outsource the item. Relevant costs are those that would change among the alternatives (make in-house versus buy from the local bakery.) If the relevant costs to keep it in-house are less than the cost to outsource (buy) it, a company will keep the function in-house. If the relevant costs to keep the function in-house exceeds the cost to outsource, a company will buy from the outside supplier. Requirement 3. In addition to the financial analysis, what else should Pasta consider when making this decision? When making any make-or-buy decision managers must look at both quantitative factors (such as the differential cost analysis that we discussed above) and qualitative factors. What if the company decided to outsource the breda-making to the local bakery and then discovers that the quality of the bread is not up to par, or that the delivery times from the local bakery are unreliable? These factors, which are not covered by a financial analysis, could create customer dissatisfaction which could lead to reduced sales. Heavenly Dessert processes cocoa beans into cocoa powder at a processing cost of $9,600 per batch. Heavenly Dessert can sell the cocoa powder as is, or it can process the cocoa powder further into either chocolate syrup or boxed assorted chocolates. Once processed, each batch of cocoa beans would result in the following sales revenue: Click the icon to view the sales revenue amounts and additional information.) Has the president made the right or wrong decision? Explain your answer. Be sure to include the correct financial analysis in your response Begin by completing the following incremental analysis to compare selling the cocoa powder as is with processing it further. (For amounts with a value of $0, make sure to enter "O" in the appropriate input box.) Sell as Sell as Sell as Boxed Cocoa Chocolate Assorted Powder Syrup Chocolates Revenue Less: Additional processing costs Net benefit Data Table Cocoa powder $ 12,000 Chocolate syrup 102,000 Boxed assorted chocolates 196,000 The cost of transforming the cocoa powder into chocolate syrup would be $74,000. Likewise, the company would incur a cost of $182,000 to transform the cocoa powder into boxed assorted chocolates. The company president has decided to make boxed assorted chocolates due to its high sales value and to the fact that the cocoa bean processing cost of $9,600 eats up most of the cocoa powder profits. Print Done Enter Begin by completing the following differential analysis to compare selling the cocoa powder as is with processing it further. We must compare the net benefit to the company of selling each product in order to determine whether the president's decision is right or wrong. Let's begin by calculating the net benefit of selling cocoa powder. Remember, there is no additional cost of processing the cocoa bean further, since the cost to process the cocoa beans into cocoa powder will be incurred no matter which of the three products is sold. Refer to the information provided and complete the table below to compute the net benefit to the company of selling the cocoa powder. (For amounts with a value of $0, make sure to enter "O" in the appropriate input box.) Sell as Cocoa Powder Revenue $ 14,000 Less: Additional processing costs Net benefit $ 14,000 es Finally we can calculate the net benefit of selling boxed assorted chocolates and compare the three net benefits to et determine the best choice for the company. Refer to the information provided and complete the table below to compute the net benefit to the company of selling boxed assorted chocolates. Sell as Sell as Sell as Boxed Cocoa Chocolate Assorted Powder Syrup Chocolates Revenue 14,000 $ 98,000 $ 192,000 Less: Additional processing costs 0 65,000 184,000 Net benefit $ 14,000 $ 33,000 $ 8,000 Has the president made the right or wrong decision? Explain your answer. When making a sell-as-is or process-further decision, management must choose the alternative that will provide the most benefit to the company. Looking at the differential analysis above, the president should select the plan that offers the highest net benefit. The president has chosen to produce and sell boxed assorted chocolates. Did he make the right choice? Castillo Petroleum has spent $202,000 to refine 64,000 gallons of petroleum distillate, which can be sold for $6.40 per gallon. Alternatively, Castillo can process the distillate further and produce 57,000 gallons of cleaner fluid. The additional processing will cost $1.75 per gallon of distillate. The cleaner fluid can be sold for $9.00 per gallon. To sell cleaner fluid, Castillo must pay a sales commiksion of $0.10 per gallon and a transportation charge of $0.15 per gallon. Read the requirements Requirement 1. Fill in the diagram for Castillo's alternatives. Revenues from selling as is $ Joint costs of producing 64,000 gallons of petroleum distillate IS Cost of processing further Revenues from processing further $ Requirements 1. Fill in the diagram for Castillo's alternatives. 2. Identify the sunk cost. Is the sunk cost relevant to Castillo's decision? 3. Should Castillo sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives. nt Help Me Solve This in Question Help Castillo Petroleum has spent $202,000 to refine 64,000 gallons of petroleum distillate, which can be sold for $6.40 per gallon. Alternatively, Castillo can process the distillate further and produce 57,000 gallons of cleaner fluid. The additional processing will cost $1.75 per gallon of distillate. The cleaner fluid can be sold for $9.00 per gallon. To sell cleaner fluid, Castillo must pay a sales commission of $0.10 per gallon and a transportation charge of $0.15 per gallon Read the requirements 61,000 of petroleum (which is the same amount whether the company sells gallons of distillate or gallons of cleaner fluid.) Revenues from selling as is 372,100 Joint costs of producing 61,000 gallons of petroleum distillate (208,000) $ Cost of processing further (132,400) Revenues from processing further 511,500 Requirement 2. Identify the sunk cost. Is the sunk cost relevant to Seminole's decision? A sunk cost is a past cost that cannot be changed regardless of which future action the company takes. Based on the information provided, which costs will the company incur regardless of whether the petroleum is sold as distillate or processed further into cleaner fluid? Requirement 3. Should Seminole sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives. Remember, to determine whether to sell a product as is or to process it further, we want to compare the net benefits the net revenues) that result from the two alternatives. We have already computed the revenues that will result from selling the petroleum distillate as is and the revenues and additional costs that will result from processing and selling the petroleum as cleaner fluid. Those amounts have been entered into the analysis for you. Complete the analysis by calculating the expected net revenue amount (the net benefit) from each of the two alternatives and then computing the differences in the expected revenues, the additional costs, and the net revenues between the "process further" and "sell as is" alternatives. (Enter decreases to profits with parentheses or minus sign. For the difference in total net revenue, use a parentheses or a minus sign if processing further will decrease total net revenue.) Process Sell As Is Further Difference 372,100 Expected revenue from selling 61,000 gallons of petroleum distillate Expected revenue from selling 55,000 gallons of cleaner fluid Additional costs of processing Total net revenue 511,500 $ 139,400 (132,400) (132,400) 379,100 $ 7,000 372,100 $