Suppose

Panini's

restaurant is considering whether to(1) bake bread for its restaurantin-house or(2) buy the bread from a local bakery. The chef estimates that variable costs of making each loaf include $0.46

ofingredients$0.22

of variable overhead(electricity to run theoven), and $ 0.75$0.75

of direct labor for kneading and forming the loaves. Allocating fixed overhead(depreciation on the kitchen equipment andbuilding) based on direct labor assigns $ 0.96$0.96

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

$ 1.76$1.76

per loaf.