Question

Lily Company purchases sails and produces sailboats. It currently produces 1,300 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Lily purchases sails at $259 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $93 for direct materials, $85 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 Lily has come to you for advice. “It would cost me $268 to make the sails,” she says, “but only $259 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 Lily make or buy the sails?

Lily should                                                                       makebuy the sails.

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If Lily suddenly finds an opportunity to rent out the unused capacity of its factory for $85,000 per year, would your answer to part (a) change?

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

Answer 1