Suppose

Olive YardOlive$$Yard

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{.}52$$$0\mathrm{.}52$

of$$ ingredients,

$ $0\mathrm{.}25$$$0\mathrm{.}25$

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

$ $0\mathrm{.}78$$$0\mathrm{.}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

$ $0\mathrm{.}98$$$0\mathrm{.}98$

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

Olive YardOlive$$Yard

$ $1\mathrm{.}76$$$1\mathrm{.}76$

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 YardOlive$$Yard

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

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

Olive YardOlive$$Yard

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 Yard

Outsourcing Decision $($Absorption Costing$)$

$$

$$

$$

$$

$$

$$

Variable cost per loaf

$$

$$

$$

Full $($absorption$)$ cost per loaf

$$

Part $2$

$2.$ Should

Olive YardOlive$$Yard

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

$$Decision:

$$

$$

Olive Yard should bake the bread in$-$house

Olive Yard should buy the bread from the local bakery

since the

$$

$$

full absorbtion cost of making each loaf is greater than

full absorbtion cost of making each loaf is less than

variable cost of making each loaf is greater than

variable cost of making each loaf is less than

the cost of outsourcing each loaf and the fixed costs are

$$

$$

avoidable.

unavoidable.

Part $3$

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

Olive YardOlive$$Yard

consider when making this$$ decision?

Olive YardOlive$$Yard

should consider the following qualitative factors before making a final$$ decision:

A$.$

Will the local bakery meet their delivery time$$ requirements?

B$.$

How does the quality and freshness of the local bakery bread compare to

Olive YardOlive$$Yard

$$bread$?$

C$.$

If labor and oven time were not devoted to$$ breadmaking, could another more profitable product be made in its$$ place?

D$.$

All of the above

E$.$

None of the above

Decision:since thesince thethe cost of outsourcing each loaf and the fixed costs arethe cost of outsourcing each loaf and the fixed costs areOlive Yard should consider the following qualitative factors before making a final decision: