Question

Riggs Company purchases sails and produces sailboats. It currently produces 1,270 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $268 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $98 for direct materials, $86 for direct labor, and $90 for overhead. The $90 overhead is based on $78,740 of annual fixed overhead that is allocated using normal capacity.

The president of Riggs has come to you for advice. “It would cost me $274 to make the sails,” she says, “but only $268 to buy them. Should I continue buying them, or have I missed something?”

If Riggs suddenly finds an opportunity to rent out the unused capacity of its factory for $77,700 per year, would your answer to part (a) change?

                                                                      YesNo. This is because the net income will                                                                       DecreaseIncrease by $

Answer 1

Particulars	Make Sails	Buy Sails	Net income increase(Decrease)
Direct Materials	98		98
Direct Labor	86		86
Variable Overhead(1270*90-78740)/1270	28		28
Purchase Price		268	(268)
Total unit Cost	212	268	(56)
Riggs should make the sails since fixed costs should not be considered as they are incurred whether co makes or buys.
In purchasing the Sails President has not considered fixed Costs.

(b) Relevant cost to make = 212*1270 + 77700 = $346,940

Buying cost = 268*1270 = $340,360

Yes, This is because the net income will Increase by $6580.