#4. Mels Meals 2 Go purchases cookies that it includes in the 10,000 box lunches it prepares and sells annually. Mels kitchen and adjoining meeting room operate at 70 percent of capacity. Mels purchases the cookies for $0.90 each but is considering making them instead. Mels can bake each cookie for $0.35 for materials, $0.15 for direct labor, and $0.59 for overhead without increasing its capacity. The $0.59 for overhead includes an allocation of $0.37 per cookie for fixed overhead. However, the total fixed overhead for the company would not increase if Mels makes the cookies.

Mel himself has come to you for advice. It would cost me $1.09 to make the cookies, but only $0.90 to buy. Should I continue buying them? Materials and labor are variable costs, but the variable overhead would be only $0.22 per cookie. Two cookies are put into every lunch.

Required:

a. Prepare a schedule to show the differential costs per cookie. (Enter your answers to 2 decimal places. Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.)

b. Should Mel continue to buy the cookies?

YES or NO?

Status Quo Alternative (Buy) (Make) Difference Cost to buy Direct material Direct labor Variable overhead Total costs higher lower none