Question

S8-10 (similar to) Suppose an Olive 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 $0.50 of ingredients, $0.23 of variable overhead (electricity to run the oven), and $0.73 of direct labor for kneading and forming the loaves. Allocating fixed overhead (depreciation on the kitchen equipment and building) based on direct labor assigns $1.04 of fixed overhead per loaf. None of the fixed costs are avoidable. The local bakery would charge Olive Yard $1.74 per loaf. Requirements: 1. What is the absorption cost of making the bread in-house? What is the variable cost per loaf? 2. Should Olive Yard bake the bread in-house or buy from the local bakery? Why?

Answer 1

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Olive yaad Decision (Absorption Costing ) Ans: 0 Outsourcing | Direct material direct labor $0.50 $0.73 Variable overhead $0.23 fixed overhead $1.04 Absorption Cost for loaf 1$2.50 Variable Cost per cloaf:- $0.50 +$0.73 +0.23 $1,46 @ Oline yard should bake the bread in house because the Variable cost of loaf is less than the buying lost which is $1.74