Suppose

Olive TreeOlive$$Tree

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\mathrm{.}46$$$0\mathrm{.}46$

of$$ ingredients,

$ $0\mathrm{.}23$$$0\mathrm{.}23$

of variable overhead$($electricity to run the$$ oven$),$ and

$ $0\mathrm{.}76$$$0\mathrm{.}76$

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\mathrm{.}06$$$1\mathrm{.}06$

of fixed overhead per loaf. None of the fixed costs are avoidable. The local bakery would charge

Olive TreeOlive$$Tree

$ $1\mathrm{.}78$$$1\mathrm{.}78$

per loaf.

$1.$ What is the absorption cost of making a loaf of bread$$ in$-$house? What is the variable cost per$$ loaf?

$2.$ Should

Olive TreeOlive$$Tree

bake the bread$$ in$-$house or buy from the local$$ bakery? Why?

$3.$ In addition to the financial$$ analysis, what else should

Olive TreeOlive$$Tree

consider when making this$$ decision?

Question content area bottom

Part $1$

$1.$ What is the absorption cost of making a loaf of bread$$ in$-$house? What is the variable cost per$$ loaf?

Olive Tree

Outsourcing Decision $($Absorption Costing$)$

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Variable cost per loaf

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Full $($absorption$)$ cost per loaf