Question

! Required information [The following information applies to the questions displayed below.) Mel's Meals 2 Go purchases cookies that it includes in the 10,000 box lunches it prepares and sells annually. Mel's kitchen and adjoining meeting room operate at 70 percent of capacity. Mel's purchases the cookies for $0.78 each but is considering making them instead. Mel's can bake each cookie for $0.28 for materials, $0.15 for direct labor, and $0.53 for overhead without increasing its capacity. The $0.53 for overhead includes an allocation of $0.34 per cookie for fixed overhead. However, total fixed overhead for the company would not increase if Mel's makes the cookies. Mel himself has come to you for advice. "It would cost me $0.96 to make the cookies, but only $0.78 to buy. Should I continue buying them?" Materials and labor are variable costs, but variable overhead would be only $0.19 per cookie. Two cookies are put into every lunch. Mel suddenly finds an opportunity to sell boxed dinners. The new opportunity would require the use of the 30 percent unused capacity. The contribution margin from the dinners would amount to $3,400 annually. Required: a. If Mel decides to sell dinners, what are the total costs for both making and buying the cookies? Answer is complete but not entirely correct. Total cost of making cookies Total cost of buying cookies $ $ 15,000 15,600 b. Should Mel continue to buy the cookies? Yes No

Answer 1

Step 1 Calculation of costs per unit for both making and buying the cookies ($) Particular Make Buy Variable expense Direct Material 0.28 Direct labour 0.15 Variable overhead 0.19 O O O Purchase cost 0 0.78 Cost per Cookies 0.62 0.78 Step 2 Determine number of cookies required Lunch Box 10000 Cookies per lunch Box are 2 Total Cookies required 20000 (10000*2)

Step 3 Calculation of total costs for both making the cookies particular Cost per Cookies 0.62 *20000 Lost contribution for dinner Total costs for both makingthe cookies Make 12400 3400 15800 Step 4 calculation of total costs for both buy the cookies Make 15600 Particular Cost per cookies $0.78*20000 Lost contribution of dinner Total costs for both making the cookies 0 15600

B. Since cost of buying the cookies ($15600) is less than the cost of making the cookies ($15800) so it is benefical to buy the cookies.