Answered: 1. What is the full product unit cost…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

The Farm House restaurant makes their own bread to serve in their restaurant. They have been approached by a local bakery offering to make the bread for them. The restaurant has two choices:

1) continue making the bread in-house, or 2) buy it from the local bakery.

The Farm House head chef estimated the variable cost of making each loaf of bread to include the following:

Sales prices and variable costs are as follows: $0.69 of ingredients, $0.25 of variable overhead, and direct labor costs to knead and form the loaves of $0.70. Allocating fixed overhead is based on direct labor. The Farm House assigns a fixed overhead cost of $1.07 per loaf. None of the fixed costs are avoidable. The local bakery would charge $1.75 per loaf.

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

The Farm House

Direct Materials
Direct Labor
Variable manufacturing overhead
Fixed manufacturing overhead
Cost per loaf of bread

2. Should the restaurant bake the bread in-house or buy from the local bakery? (Use zero if there is no value).

Bread Costs	Make	Outsource	Difference (Make - Outsource)
Variable Costs:
Direct Materials
Direct Labor
Variable manufacturing overhead
Purchase cost
Total differential cost per loaf

3. What would you recommend?

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