three brothers restaurant purchases cheesecakes and offers them as dessert items on 544833

Outsourcing Decision

P 6. Three Brothers Restaurant purchases cheesecakes and offers them as dessert items on its menu. The cheesecakes cost $24 each, and a cake contains 8 pieces. The supplier recently gave advance notice that the price will rise by 20 percent immediately. Three Brothers Restaurant has idle equipment that with only a few minor changes could be used to produce similar cheesecakes.

Cost estimates have been prepared under the assumption that the company could make the product itself. Direct materials would cost $7.00 per cheesecake. Direct labor required would be 0.5 hour per cheesecake at a labor rate of $24.00 per hour. Variable overhead would be $9.00 per cheesecake. Fixed overhead, which would be incurred under either decision alternative, would be $35,200 a year for depreciation and $230,000 a year for other costs. Production and usage are estimated at 3,600 cheesecakes a year. (Assume that any idle equipment cannot be used for any other purpose.)

Required

1. Prepare an incremental analysis to determine whether the cheesecakes should be made within the company or purchased from the outside supplier at the higher price.

2. Compute the variable unit cost to (a) make one cheesecake and (b) buy one cheesecake.