I need help with the following problem: Exercise 7-7 Riggs Company purchases sai
ID: 2445094 • Letter: I
Question
I need help with the following problem:
Exercise 7-7 Riggs Company purchases sails and produces sailboats. It currently produces 1,290 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $260 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $95.69 for direct materials, 588.14 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 $273.83 to make the sails, she says, but only $260 to buy them. Should I continue buying them, or have! missed something, Prepare a per unit analysis of the differential costs. If Riggs suddenly finds an opportunity to rent out the unused capacity of its factory for $77,600 per year, would your answer to part (a) change?Explanation / Answer
Particulars Make Sails Buy Sails Net inc increase(Decrease) Direct Materials 95.69 95.69 Direct Labour 88.14 88.14 Variable Overhead(1290*90-78100)/1290 29.46 29.46 Purchase Price 260.00 (260.00) Total unit Cost 213.29 260.00 (46.71) Riggs should make the sails Particulars Make Sails Buy Sails Net inc increase(Decrease) Direct Materials 95.69 95.69 Direct Labour 88.14 88.14 Variable Overhead(1290*90-78100)/1290 29.46 29.46 Purchase Price 260.00 (260.00) Oppurtunity cost(77600/1290) (60.16) Total unit Cost 213.29 199.84 13.44 In this case we would purchase the sails Net Income will inc by 60.16 per unit