Exercise 7-7 (Part Level Submission) Riggs Company purchases sails and produces
ID: 2407218 • Letter: E
Question
Exercise 7-7 (Part Level Submission) Riggs Company purchases sails and produces sailboats. It currently produces 1,290 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $273 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $91.59 for direct materials, $85.99 for direct labor, and $90 for overhead. The $90 overhead includes $78,100 of annual fixed overhead that is allocated using normal capacity. The president of Riggs has come to you for advice. “It would cost me $267.58 to make the sails,” she says, “but only $273 to buy them. Should I continue buying them, or have I missed something?”
Explanation / Answer
Solution:
Relevant Cost if Product is Purchased
Purchase Price
273
Total Relevant Cost
273
Relevant Cost if Product is Manufactured
Direct Materials
91.59
Direct Labor
85.99
Total Relevant Cost
177.58
Savings
Cost of purchase
273
Cost of manufacture
177.58
Savings if product is manufactured
95.42
*Fixed costs ignored because costs will beincurred no matter which choice is made
Thus product should be manufactured due to a savings of $95.42 per unit
?
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Relevant Cost if Product is Purchased
Purchase Price
273
Total Relevant Cost
273
Relevant Cost if Product is Manufactured
Direct Materials
91.59
Direct Labor
85.99
Total Relevant Cost
177.58
Savings
Cost of purchase
273
Cost of manufacture
177.58
Savings if product is manufactured
95.42
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