Question

Riggs Company purchases sails and produces sailboats. It currently produces 1,290 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $253 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $92 for direct materials, $86 for direct labor, and $90 for overhead. The $90 overhead is based on $78,690 of annual fixed overhead that is allocated using normal capacity.

The president of Riggs has come to you for advice. “It would cost me $268 to make the sails,” she says, “but only $253 to buy them. Should I continue buying them, or have I missed something?”

(a)

Prepare a per unit analysis of the differential costs. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Make Sails		Buy Sails		Net Income Increase (Decrease)
Direct material		$		$		$
Direct labor
Variable overhead
Purchase price
Total unit cost		$		$		$

Should Riggs make or buy the sails?

Riggs should                                                                       buymake the sails.

Answer 1

Total fixed overheads = $78,690

Normal capacity = 1,290 units

Fixed overhead per unit =  Total fixed overheads/ Normal capacity

= 78,690/1,290

= $61

Overhead per unit = $90

Variable overhead per unit = Overhead per unit- Fixed overhead per unit

= 90-61

= $29

	Make Sails	Buy Sails	Net Income
			Increase (Decrease)
Direct material	92	0	-92
Direct labor	86	0	-86
Variable overhead	29	0	-29
Purchase price	0	253	253
Total unit cost	207	253	46

Net incremental advantage of making = $46 per sail

Sails should be made.

Riggs should make the sails.

Kindly comment if you need further assistance.

Thanks‼!