Suppose a Roasted Olive 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 $ 0.52 of ingredients, $ 0.24 of variable overhead (electricity to run the oven), and $ 0.70 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 $ 1.75 per loaf.

Requirements

1. What is the full product unit cost of making the bread in- house?

2. Should Roasted Olive bake the bread in- house or buy from the local bakery? Why?

3. In addition to the financial analysis, what else should Roasted Olive consider when making this decision?