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 RMI , 120. The marginal cost of producing cookies is RM410. Required: (a) Should the manager decide to buy or make the cakes? Show computations. (b) Why must opportunity cost be considered in the situation above? (c) What qualitative factors might influence the decision about whether to make or buy the cakes?

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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 RMI , 120. The marginal cost of producing cookies
is RM410.
Required:
(a) Should the manager decide to buy or make the cakes? Show computations.
(b) Why must opportunity cost be considered in the situation above?
(c) What qualitative factors might influence the decision about whether to make or buy
the cakes?
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Accounting For Decision Making

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Transcribed Image Text

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 RMI , 120. The marginal cost of producing cookies is RM410. Required: (a) Should the manager decide to buy or make the cakes? Show computations. (b) Why must opportunity cost be considered in the situation above? (c) What qualitative factors might influence the decision about whether to make or buy the cakes?