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 $0.66 each but is considering making them instead. Mel’s can bake each cookie for $0.20 for materials, $0.15 for direct labor, and $0.57 for overhead without increasing its capacity. The $0.57 for overhead includes an allocation of $0.31 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 $0.92 to make the cookies, but only $0.66 to buy. Should I continue buying them?” Materials and labor are variable costs, but variable overhead would be only $0.26 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 $2,900 annually.

Required:

a. If Mel decides to sell dinners, what are the total costs for both making and buying the cookies?

Total cost of making cookies
Total cost of buying cookies

Answer 1

Calculation of Total cost for Both Making & buying the cookies
Particulars				Make	Buy
Cost per cookies (20000*0.61),(20000*0.66)				12200	13200
Lost contribution of dinner				2900	0
Total cost for make & buy				15100	13200
cost per unit for both making & buying				Make	Buy
Direct material				0.2
Direct labor				0.15
variable overhead				0.26
Purchase cost					0.66
Cost per cookies				0.61	0.66

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