Question

Exercise 7-7 a-b (Video) Riggs Company purchases sails and produces sailboats. It currently produces 1,280 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $258 each, but the company is e sails instead. The manufacturing cost per sail would be $91 for direct materials, $87 for direct labor, and $90 for overhead. The $90 overhead is based on $78,080 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 to make the sails," she says, "but only $ 258 to buy them. Should I continue buying them, or have I missed something?" Prepare a per unit analysis of the differential costs. (Enter negative amounts using either a negative sign preceding the number e.g.-45 or parentheses e.g. (45).) Make Sails Buy Sails Net Income Increase (Decrease) Direct material Direct labor Variable overhead Purchase price Total unit cost Should Riggs make or buy the sails? Riggs should the sails. 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? . This is because the net income will by $

Answer 1

Differential analysis

	Make Sails	Buy Sails	Net income increase (Decrease)
Direct material	91		91
Direct labor	87		87
Variable overhead	29		29
Purchase price		258	-258
Total unit cost	207	258	-51

Riggs should make the sails

Yes, this is because the net income will increase by $12320