Problem
After operating in December and processing many jobs, the manager for Laucala branch came to know that Nausori Bakery sells plain cakes without decorations.It is estimated that the branch will require 100 cakes per month. The cakes will be produced in 20 batches. The manager came to an agreement with the owner of Nausori Bakery to buy plain cakes at a price of $15.00 per cake. Actual costs for making cakes (without decorations) in December were as follows:
- Direct Materials $70.00 per batch
- Indirect Materials $10.00 per 20 cakes
- Direct Labour $600.00 per month
- Indirect Labour $150.00 per fortnight
- Variable Manufacturing Overhead $40.00 per batch
- Fixed Manufacturing Overhead $200.00 per month
It is forecasted that the branch will not be able to avoid $100 for fixed manufacturing overhead if it buys plain cakes from Nausori Bakery.
Required: If you are the manager of Laucala branch, would you make or buy plain cakes from Nausori Bakery? Show all necessary calculations.