Question

A hamburger restaurant currently makes the buns for its hamburgers. It uses 100,000 buns annually, and the costs to make the bun per unit are as follows:

DL cost TL0.21 Variable overhead TL0.14

DM cost TL0.28 Fixed overhead TL0.49

A bakery has offered to sell the restaurant buns for TL0.77 each. If the buns are purchased, 25% of the fixed overhead could be avoided. If the offer is accepted, what is the financial impact on the restaurant?

Answer 1

Answer : Calculation of Financial imapct of accepting order from bakery :

Financial impact can be determined by comparing make and buy cost of buns

If the offer from bakery is accepted :

Purchase price per Bun = 0.77 each

Total Purchase Cost = 0.77 * 100000 buns =TL 77000

If the offer from bakery is not accepted we will continue making Buns :

Cost to make bun per unit=Direct Labour cost+Direct Material Cost+Variable overhead + Avoidable Fixed Overhead

= 0.21 + 0.28 + 0.14 + (0.49 * 25%)

= 0.7525 per bun

Total Cost of making = 0.7525 * 100000 = TL75250

Note : Fixed cost which are avoidable are only relevant for decision making process.

Therefore if offer would be accepted then additional cost to hamburger restaurant will be TL1750 (77000 - 75250). Due to increase in cost its profits will be lower by TL1750.