Question

Exercise 7-7 a-b (Video) Riggs Company purchases sails and produces sailboats. It currently produces 1,200 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $267 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $99 for direct materials, $84 for direct labor, and $90 for overhead. The $90 overhead is based on $78,000 of annual fixed overhead that is allocated using normal capacity. The president of Riggs has come to you for advice. “It would cost me $273 to make the sails,” she says, “but only $267 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.

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If Riggs suddenly finds an opportunity to rent out the unused capacity of its factory for $77,800 per year, would your answer to part (a) change? NoYes . This is because the net income will DecreaseIncrease by $ .

Answer 1

Req 1.
Differential analysis
			Make	Buy	Effect On Income
Direct material		118800	0	118800
Direct labour		100800	0	100800
Variable oh		30000	0	30000
Purchase price		0	320400	-320400
Total cost			249600	320400	-70800
Rigs Should MAKE the sail
Req 2.
Differential analysis
			Make	Buy	Effect On Income
Direct material		118800	0	118800
Direct labour		100800	0	100800
Variable oh		30000	0	30000
Opportunity cost-Rent revenue	77800	0	77800
Purchase price		0	320400	-320400
Total cost			327400	320400	7000
Yes, answer is changed
This is because the net income will increase by $7000.