Gibbs Company purchases sails and produces sailboats. It currently produces 1,25

Question

Gibbs Company purchases sails and produces sailboats. It currently produces 1,258 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Gibbs purchases sails at $270.00 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $95.60 for direct materials, $82.00 for direct labor, and $100 for overhead. The $100 overhead is based on $78,400 of annual fixed overhead that is allocated using normal capacity. The president of Gibbs has come to you for advice.

Explanation / Answer

Hi, Please find the answer as follows: You will have to consider only the variable costs in the given case = 95.6 + 82 = 177.6 Since it less than the cost of purchase, Gibbs company can produce the sails inhouse. Thanks.

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