Riggs Company purchases sails and produces sailboats. It currently produces 1,20

Question

Riggs Company purchases sails and produces sailboats. It currently produces 1,200 sailboats per year, operating at normal capacity, which is about 80 % of full capacity. Riggs purchases sails at $ 267 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $ 99.02 for direct materials, $ 84.23 for direct labor, and $ 90 for overhead. The $ 90 overhead includes $ 78,000 of annual fixed overhead that is allocated using normal capacity.

The president of Riggs has come to you for advice. “It would cost me $ 273.25 to make the sails,” she says, “but only $ 267 to buy them. Should I continue buying them, or have I missed something?”

A) 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).)

Explanation / Answer

Make Buy Differential effect on income sails sails Direct materials 99.02 99.02 Direct labor 84.23 84.23 variable overhead 25 25 purchase price 267 -267 total unit cost 208.25 267 -58.75 Variable overhead = overhead cost per unit-FOH per unit 90 -(78000/1200) 25

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