Swifty Company purchases sails and produces sailboats. It currently produces 1,2
ID: 2585325 • Letter: S
Question
Swifty Company purchases sails and produces sailboats. It currently produces 1,250 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Swifty purchases sails at $263 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $93.89 for direct materials, $81.18 for direct labor, and $90 for overhead. The $90 overhead is based on $78,400 of annual fixed overhead that is allocated using normal capacity.
The president of Swifty has come to you for advice. “It would cost me $265.07 to make the sails,” she says, “but only $263 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. If amount decreases net income then enter the amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
Should Swifty make or buy the sails?
Increase (Decrease) Direct material $ $ $ Direct labor Variable overhead Purchase price Total unit cost $ $ $
Explanation / Answer
Preparation of per unit analysis of different costs
Relevant cost if product is purchased:
Given that
Purchase price = $ 263
Total relevant cost =$263
Relevant cost if product is manufactured :
From the given data
Cost to be incurred :
Direct materials = $93.89
Direct labour = $81.18
Total relevant cost =$175.07
Fixed costs are ignored due to costs being incurred no matter which choice is made in it
Savings:
From the calculated relevant costs determine the savings of the product
Cost of the purchase = $ 263
Cost of the manufacture = ($175.07)
Amount saved from manufacturing = $87.93
The product should be manufactured due to the savings of $87.93 per unit
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