Question

Winston Company makes decorative wedding cakes. The company is considering buying the cakes rather than baking​ them, which will allow it to concentrate on decorating. The company averages

100 wedding cakes per year and incurs the following costs from baking wedding​ cakes: Please see pictures below Thank you

Fixed costs are primarily the depreciation on kitchen equipment such as ovens and mixers. Winston expects to retain the equipment. Winston can buy the cakes for $23. Winston Company makes decorative wedding cakes. The company is considering buying the cakes rather than baking them, which will allow it to concentrate on decorating. The company averages 100 wedding cakes per year and incurs the following costs from baking wedding cakes (Click the icon to view the costs.) 11. Should Winston make the cakes or buy them? Why? 12. If Winston decides to buy the cakes, what are some qualitative factors that Winston should also consider? 11. Should Winston make the cakes or buy them? Why? (For the Difference column, use a minus sign or parentheses only when the cost of outsourcing exceeds the cost of making the cakes in-house.) Make Difference Outsource cakes Cake costs cakes (make-outsource) Variable costs: Direct materials Direct labor Variable manufacturing overhead Enter any number in the edit fields and then continue to the next question.

Answer 1

Relevant Cost of making cakes in house:
Direct Materials	625
Direct Labour	775
Variable Manufacturing Overhead	300
Total Relevant Cost of making the cakes	1700
Per unit cost of making	17
Per unit Cost of Purchasing the cake	23
Total Cost for 100 Units	2300
Net Loss of Purchasing from Outside	600

Thus winston should continue making the cakes. Outsourcing will result in reduction of operating income by $ 600

If winston decides to buy the cakes, he should consider Qualitative factors such as Quality of cake & its on time delivery.