Riggs Company purchases sails and produces sailboats. It currently produces 1,26

Question

Riggs Company purchases sails and produces sailboats. It currently produces 1,260 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $264 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $94.52 for direct materials, $80.28 for direct labor, and $90 for overhead. The $90 overhead includes $78,300 of annual fixed overhead that is allocated using normal capacity. The president of Riggs has come to you for advice. "It would cost me $264.80 to make the sails," she says, "but only $264 to buy them. Should I continue buying them, or have I missed something?" Prepare a per unit analysis of the differential costs. (Round answers to 2 decimal places, e.g. 15.25. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Should Riggs make or buy the sails? Riggs should the sails.

Explanation / Answer

Make Buy Net Income Decrease Direct material 94.52 Direct Labor 80.28 Variable overhead 90 90 Purchase price 264 Total Unit cost 264.8 354 89.2 Riggs should make sails as overheads are fixed and will be recovered even if purchased from outside therby increasing cost of production

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