Suppose a Panini’s 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, $ 0.22 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 $ 0.96 of fixed overhead per loaf. None of the fixed costs are avoidable. The local bakery would charge Panini’s $ 1.76 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 Panini’s bake the bread in- house or buy from the local bakery? Why?
3. In addition to the financial analysis, what else should Panini’s consider when making this decision?