Question

Exercise 20-07 a-b Riggs Company purchases sails and produces sailboats. It currently produces 1,240 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $255 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $91 for direct materials, $85 for direct labor, and $90 for overhead. The $90 overhead is based on $78,120 of annual fixed overhead that is allocated using normal capacity. The president of Riggs has come to you for advice. “It would cost me $266 to make the sails,” she says, “but only $255 to buy them. Should I continue buying them, or have I missed something?”

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.

If Riggs suddenly finds an opportunity to rent out the unused capacity of its factory for $81,800 per year, would your answer to part (a) change? YesNo . This is because the net income will IncreaseDecrease by $ .

Answer 1

Answer 1:

	Make Sails	Buy Sails	Net Income
Direct Material	$ 112,840.00		$ 112,840.00
Direct Labor	$      105,400		$      105,400
Variable overhead	$        33,480		$        33,480
Purchase price		$ 316,200	$    (316,200)
Total unit cost	$      251,720	$316,200	$      (64,480)

Calculations:

	Make Sails	Buy Sails
Direct Material	=1240*91
Direct Labor	=1240*85
Variable overhead	=1240*27
Purchase price		=1240*255

Answer 2:

The company SHOULD MAKE the sails.

In case of any doubt, please feel free to comment.