Suppose Fine Cuisine restaurant is considering whether to (1) bake bread for its

Question

Suppose Fine Cuisine 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 S0.46 of ingredients, $0.22 of variable overhead (electricity to run the oven), and S0.74 of direct labor for kneading and forming the loaves. Allocating fixed overhead (depreciation on the kitchen equipment and building) based on direct labor, Fine Cuisine assigns $1.00 of fixed overhead per loaf. None of the fixed costs are avoidable. The local bakery would charge $1.68 per loaf Read the requirements Requirements 1. What is the unit cost of making the bread in-house? Complete the following outsourcing decision analysis to determine Fine Cuisine's unit cost of making the bread. Fine Cuisine Outsourcing Decision Direct material Variable overhead Variable cost per unit Plus: Fixed overhead per unit Cost per unit Requirement 2. Should Fine Cuisine bake the bread in-house or buy from the local bakery? Why? Decision Vsince the Vof making each loaf is Vthe cost of outsourcing each loaf.

Explanation / Answer

Req 1: UNIT COST OF MAKING THE BREAD: Direct Material 0.46 Direct labour 0.74 Vraiable Overheads 0.22 variable cost per unit 1.42 Plus: Fixed cost per unit 0.00 Cost per unit 1.42 Note: As fixed cost is unavoidable, it is irrelevant for decision making. Hence not icnluded in cost of making the bread for outsourcing decision. Req 2: Decisiion: Fine cusines shall make the Bread since the cost of making each loaf is lesser than the cost of outsourcing the loaf. Req 3: Answer is C. Both A and B.

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