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Chapter 25: Q25-6SE (page 1409)

Suppose Roasted Pepper 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 \(0.52 of ingredients, \)0.27 of variable overhead (electricity to run the oven), and \(0.79 of direct labor for kneading and forming the loaves. Allocating fixed overhead (depreciation on the kitchen equipment and building) based on direct labor, Roasted Pepper assigns \)0.96 of fixed overhead per loaf. None of the fixed costs are avoidable. The local bakery would charge $1.78 per loaf.

Requirements

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

2. Should Roasted Pepper bake the bread in-house or buy from the local bakery? Why?

3. In addition to the financial analysis, what else should Roasted Pepper consider when making this decision?

Short Answer

Expert verified

Answer

The full product unit cost of the bread is$2.54.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Variable Cost

The term variable cost refers to the cost that changes with each level of production. The variable cost directly relates to theproduction leveland enables the management to determine the price of a product.

02

Computation of full product unit cost

Particulars

Amounts ($)

Direct material

0.52

Direct labor

0.79

Variable overhead

0.27

Total variable cost per unit

1.58

Fixed overhead per leaf

0.96

Full product unit cost

$2.54

03

Decision on buy or make

As per the above calculations, the company should continue to make the product in-house because it will cost cheaper than buying it from the outside. The total variable cost per unit is $1.58, and the local bakery is offering the same at a price of $1.78, which is$0.20 higher.

Hence, the product should be made in-house.

04

Consideration of related factors

The Roasted Pepper should consider the following factors in addition to its financial analysis:

  • The company must consider therequirement of the capacities for accepting such an offer from the local bakery.
  • Thequality of the product served by the local bakery should also be considered by the company.
  • Also, the company must ensure that if it buys the bread from the local bakery, then thedeliveries should be on time.

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Most popular questions from this chapter

Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Collector-Cardz with a special order. The Hall of Fame wishes to purchase 56,000 baseball card packs for a special promotional campaign and offers \(0.38 per pack, a total of \)21,280. Collector-Cardz鈥檚 total production cost is \(0.58 per pack, as follows:

Variable costs:

Direct materials \)0.11

Direct labor 0.09

Variable overhead 0.08

Fixed overhead 0.30

Total cost \(0.58

Collector-Cardz has enough excess capacity to handle the special order.

Requirements

1. Prepare a differential analysis to determine whether Collector-Cardz should accept the special sales order.

2. Now assume that the Hall of Fame wants special hologram baseball cards. Collector-Cardz will spend \)5,700 to develop this hologram, which will be useless after the special order is completed. Should Collector-Cardz accept the special order under these circumstances, assuming no change in the special pricing of $0.38 per pack?

McCollum Company manufactures two products. Both products have the same sales price, and the volume of sales is equivalent. However, due to the difference in production processes, Product A has higher variable costs and Product B has higher fixed costs. Management is considering dropping Product B because that product line has an operating loss.

MCCOLLUM COMPANY

Income Statement

Month Ended June 30, 2018

Total Product A Product B

Net Sales Revenue \(150,000 \)75,000 \(75,000

Variable Costs 90,000 55,000 35,000

Contribution Margin 60,000 20,000 40,000

Fixed Costs 50,000 5,000 45,000

Operating Income/(Loss) \)10,000 \(15,000 \)(5,000)

  1. If fixed costs cannot be avoided, should McCollum drop Product B? Why or why not?
  2. If 50% of Product B鈥檚 fixed costs are avoidable, should McCollum drop Product B? Why or why not?

When completing a differential analysis, when are the differences shown as positive amounts? As negative amounts?

What are the two keys in short-term decision making?

Refer to details about Skiable Acres from Short Exercise S25-2. Assume that Skiable Acres鈥檚 reputation has diminished and other resorts in the vicinity are charging only \(85 per lift ticket. Skiable Acres has become a price-taker and will not be able to charge more than its competitors. At the market price, Skiable Acres managers believe they will still serve 725,000 skiers and snowboarders each season.

Requirements

1. If Skiable Acres cannot reduce its costs, what profit will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level?

2. Assume Skiable Acres has found ways to cut its fixed costs to \)30,000,000. What is its new target variable cost per skier/snowboarder?
See all solutions

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