Question

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.

Required:

a. Prepare a schedule to show the differential costs per cookie. (Enter your answers to 2 decimal places. Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.)

	Status Quo (buy)	Alternative (make)	Difference	Difference (higher/lower)
Cost to buy
Direct Material
Direct Labor
Variable Overhead
Total Cost

B. Should Mel Continue to buy the cookies?

Answer 1

Meals 2 Go Cost to buy Direct material Direct labor Variable overhead Status Quo Alternative Difference (Buy) (Make) (Buy - Make) 0.78 0 0.78 (higher) 0 0.28 0.28 (lower) 0 0.15 0.15 (lower) 0 0.19 0.19 (lower) 0.78 0.62 0.16 (higher) Mel could save $0.16 per cookie ($0.32 per lunch) by making the cookies rather than buying them.