This peculiar term is very confusing. Even the creators of this term aren't quite sure what it REALLY means.
A person who is going to beat someone else may be serving them a tray of fail muffins. Or perhaps just one fail muffin. It depends on the size of the fail.
Or, it usually is used to describe something that really sucks.
You might tell someone to eat a fail muffin if they do something dumb. Or, you know, fail.
"Biology eats the fail muffin."
"Haha yeah, I hate Bio."
"...eat a fail muffin dude.."
"I'm gonna beat you so bad"
"No way man! I'm gonna serve you a fail muffin!"