Question

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.
Amount Per Unit
Sales revenue $18,000 $6.00
Costs of meals produced 13,500 4.50
Gross profit $4,500 $1.50
Administrative costs 2,100 0.70
Operating profit $2,400 $0.80


Fixed costs included in this income statement are $4,500 for meal production and $600 for administrative costs. Maria has received a special request from an organization sponsoring a picnic to raise funds for the Special Olympics. This organization is willing to pay $3.50 per meal for 300 meals on April 10. Maria has sufficient idle capacity to fill this special order. These meals will incur all of the variable costs of meals produced, but variable administrative costs and total fixed costs will not be affected.

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?

Answer 1

Answer: (a) Total Cost $900, (b) since she can make a profit of $0.50 Mel should continue to buy the cookies

Explanation:

$

Cost of the meal. 13,500

Less : Gross Margin. 4,500

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Relevant cost. 9,000

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Relevant cost per unit = Relevant cost / Annual contribution margin

= 9,000/ 3,000

= $3

To determine the total cost = Relevant cost per unit × meal paid for

= $3 × 300

= $900

To compare the price

$3.50 - $3.00

= $0.50

Since Mel can make a profit of $0.50, she should be buying the cookies,

Answer 2

Answer:

a) Total cost for making and buying the cookies = $900

b) Yes, she should continue to buy the cookies

Explanation:

Number of meals of order received = 300 meals

Relevant cost:

Variable cost per meal produced =

     (cost of meal produced - Gross product)/Annual contribution margin

Variable cost per meal = (13500 - 4500)/3000

Variable cost per meal = 9000/3000

Variable cost per meal = $3

Total cost = cost per meal * number of meals

Total cost = 300 * 3 = $900

Total cost for making and buying the cookies = $900

b) Should Mel continue to buy the cookies?

Selling price = $3.50

Relevant cost = $3.00

Profit per meal from special request = $3.50 - $3.00

Profit per meal from special request = $0.50

Since she is making a profit of $0.50 per meal, she should continue to buy the cookies