Question

Required information Exercise 4-47 and 4-48 (Static) (LO 4-4) [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 $0.60 each but is considering making them instead. Mel’s can bake each cookie for $0.20 for materials, $0.15 for direct labor, and $0.45 for overhead without increasing its capacity. The $0.45 for overhead includes an allocation of $0.30 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 $0.80 to make the cookies, but only $0.60 to buy. Should I continue buying them?" Materials and labor are variable costs, but variable overhead would be only $0.15 per cookie. Two cookies are put into every lunch. Exercise 4-48 (Static) Make or Buy with Opportunity Costs (LO 4-4) 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 $3,000 annually. Required: a. If Mel decides to sell dinners, what are the total costs for both making and buying the cookies? b. Should Mel continue to buy the cookies? Yes No

Answer 1

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

if Mel decides to sell dinners, the he will not have any spare capacity for producing cookies, so the production costs would be different:

direct materials $0.20

direct labor $0.15

total overhead (including variable and fixed) $0.45

total cost per cookie = $0.80

Purchase price form external supplier = $0.60 per cookie (same as before).

b. Should Mel continue to buy the cookies? Yes No

It would be better for Mel to simply buy the cookies from an external supplier at $0.60.

Mel should only produce the cookies if he decides not to sell dinners.