Question

Suppose an Olive Tree 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 $ 0.56 of​ ingredients, $ 0.24 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 $ 0.96 of fixed overhead per loaf. None of the fixed costs are avoidable. The local bakery would charge Olive Tree $ 1.74 per loaf. 1. What is the absorption cost of making the bread​ in-house? What is the variable cost per​ loaf? 2. Should Olive Tree bake the bread​ in-house or buy from the local​ bakery? Why? 3. In addition to the financial​ analysis, what else should Olive Tree consider when making this​ decision?

1. What is the absorption cost of making the bread in-house? What is the variable cost per loaf? Olive Tree Outsourcing Decision (Absorption Costing) Variable cost per loaf Full (absorption) cost per loaf 2. Should Olive Tree bake the bread in-house or buy from the local bakery? Why? Decision: V since the the cost of outsourcing each loaf. 3. In addition to the financial analysis, what else should Olive Tree consider when making this decision? Olive Tree should consider the following qualitative factors before making a final decision: O A. Will the local bakery meet their delivery time requirements? B. If labor and oven time were not devoted to breadmaking, could another more profitable product be made in its place? OC. How does the quality and freshness of the local bakery bread compare to Olive Tree bread? O D. All of the above O E. None of the above

Answer choices:

Answer 1

1.unit cost of making bread in-house.

direct material	$0.56
direct labor	$0.73
variable overhead	$0.24
variable cost per unit [0.56+0.73+.24]	$1.53
Plus: fixed overhead per unit	$0.96
full (absorption) cost per unit	$2.49

2.olive tree should bake the bread in house since the variable cost of making each loaf is less than cost of outsourcing each loaf [1.53-1.74] =0.21$

3.while outsourcing other non financial decision should be considered like:

• timely deliveries
• other opportunities to use the freed capacity
• quality of product when outsourced
• ANSWER
• ALL OF THE ABOVE.