Riggs Company purchases sails and produces sailboats. It currently produces 1,25

Question

Riggs 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. Riggs purchases sails at $ 262 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $ 94.17 for direct materials, $ 84.43 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 $ 268.60 to make the sails,” she says, “but only $ 262 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).)

Explanation / Answer

Particulars Make Sails Buy Sails Net inc increase(Decrease) Direct Materials                94.17                94.17 Direct Labour                84.43                84.43 Variable Overhead(1250*90-78100)/1250                27.52                27.52 Purchase Price              260.00           (260.00) Total unit Cost              206.12              260.00              (53.88) Riggs should make the sails since fixed costs should not be considered as they are incurred whether co makes or buys In purchasing the Sails President has not considered fixed Costs

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