Riggs Company purchases sails and produces sailboats. It currently produces 1,30
ID: 2487746 • Letter: R
Question
Riggs 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. Riggs purchases sails at $ 261 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $ 90.46 for direct materials, $ 87.51 for direct labor, and $ 90 for overhead. The $ 90 overhead includes $ 78,400 of annual fixed overhead that is allocated using normal capacity.
The president of Riggs has come to you for advice. “It would cost me $ 267.97 to make the sails,” she says, “but only $ 261 to buy them. Should I continue buying them, or have I missed something?”
Riggs 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. Riggs purchases sails at $ 261 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $ 90.46 for direct materials, $ 87.51 for direct labor, and $ 90 for overhead. The $ 90 overhead includes $ 78,400 of annual fixed overhead that is allocated using normal capacity.
The president of Riggs has come to you for advice. “It would cost me $ 267.97 to make the sails,” she says, “but only $ 261 to buy them. Should I continue buying them, or have I missed something?”
Explanation / Answer
Overhead=$90
Fixed overhead=$78,400
Fixed overhead per unit at Normal Capacity=$78,400/1,300=$60.31
Variable overhead=$90-60.31=$29.69
The fixed cost will not take consider to take decisions.
so Riggs Company should produce, otherwise the loss will increase $53.34 per unit.
f Riggs suddenly finds an opportunity to rent out the unused capacity of its factory for $78,000 per year,stil answer will not change, but the net income will increase by $78,000
Particulars Make Sails $ Buy Sails $ Net Income Increase (Decrease) $ Direct material 90.46 0 90.46 Direct labor 87.51 0 87.51 Variable overhead 29.69 0 29.69 Purchase price 0 261 -261 Total unit cost 207.66 261 -53.34Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.