Question

Hawley 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.

Direct materials $550
Direct labor 950
Variable manufacturing overhead 150
Fixed manufacturing overhead 1,125
Total manufacturing cost $2,775
Number of cakes / 100
Cost per cake $28
Fixed costs are primarily the depreciation on kitchen equipment such as ovens and mixers. Hawley expects to retain the equipment. Hawley can buy the cakes for 28$.
1. Should Hawley make the cakes or buy​ them? Why?
2. If Hawley decides to buy the​ cakes, what are some qualitative factors that Hawley should also​ consider?
1. Should Hawley 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 Outsource Difference
Cake costs cakes cakes (make—outsource)
Variable costs:
Direct materials
Direct labor
Variable manufacturing overhead
Purchase cost
Total differential cost of cakes
Hawley (should, should not) continue to make the cakes. Outsourcing will (decrease, increase) profits.
2. If Hawley decides to buy the cakes, what are some qualitative factors that Hawley should also consider?
A. Qualitative factors include considering sunk costs and​manager's opinions.
B. Qualitative factors include separating fixed and variable costs.
C. Qualitative factors include quality and​ on-time delivery.
D. Qualitative factors include contribution margins of the various products produced.

Answer 1

1. Continue to Make the Cakes. Because the Cost of Outsourcing is greater that the cost of making by $1,150.

2. C. Qualitative factors include quality and​ on-time delivery.

Step-by-step explanation:

Analysis of the Make or Buy Decision

Make Outsource Difference

Cake costs cakes cakes

Variable costs:

Direct materials $550 $0 $550

Direct labor $950 $0 $950

Variable manufacturing overhead $150 $0 $150

Fixed manufacturing overhead $1,125 $1,125 $0

Purchase cost $0 $2,800 ($2,800)

Total differential cost of cakes $2,275 $3,925 ($1,150)

Qualitative Factors.

Are non-monetary factors that need to be considered in decision making.