Question

Suppose Brady House 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 $0.54 of ingredients, $0.25 of wariable overhead (electricity to run the oven), and $0.72 of direct labor for kneading and forming the loaves. Allocating fixed overhead (depreciation on the kitchen equipment and building) based on direct labor, Brady House assigns $1.05 of Fixed overhead per loaf. None of the fixed costs are avoidable. The local bakery would charge $1.70 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 Brady House's unit cost of making the bread. Brady House Outsourcing Decision i Requirements Direct material Direct labor Variable overhead Variable cost per unit 1. What is the full product unit cost of making the bread in-house? 2. Should Brady House bake the bread in-house or buy from the local bakery? Why? 3. In addition to the financial analysis, what else should Brady House consider when making this decision? Plus: Fixed overhead per unit Cost per unit Print Done

Answer 1

1.

Brady House Outsourcing Decision
Direct material	$0.54
Direct labor	0.72
Variable overhead	0.25
Variable cost per unit	1.51
Plus: Fixed overhead per unit	1.05
Cost per unit	$2.56

2.

Brady house should bake the bread in house as variable cost per unit is $1.51 which is less than purchase price offered by local bakery.

3.

Brady house should consider quality of bread provided by local bread and delivery time of local bread