Reference no: EM132534400

Sally Restaurant prepared all kind of meals for breakfast, lunch, teatime, dinner and supper. The manager is considering whether to buy or make their own cakes which were served in all meals. Previously the cakes can be purchased from an outside supplier for RM2,300 per month. However, start from the next month the price of cakes is expected to increase by 50%.

The cost of making the cakes for a month is estimated to be:

Direct materials   RM1,260             Variable overhead RM520

Direct labor          RM1,500              Fixed overhead RM2,400

• The production of cakes requires 200 hours of a special oven which is now fully utilized by production of cookies. If production of cakes is undertaken, production of cookies would be reduced and resulting in a loss of revenue of RM1,120. The marginal cost of producing cookies is RM410.

Required:

Question (a) Should the manager decide to buy or make the cakes? Show computations.

Question (b) Give TWO (2) qualitative factors might influence the decision about whether to make or buy the cakes?