Question

Question 2 Cullumber Company purchases sails and produces sailboats. It currently produces 1,240 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Cullumber purchases sails at $255 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $91 for direct materials, $85 for direct labor, and $90 for overhead. The $90 overhead is based on $78,120 of annual fixed overhead that is allocated using normal capacity. The president of Cullumber has come to you for advice. "It would cost me $266 to make the sails," she says, "but only $255 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 Cullumber make or buy the sails? Cullumber should the sails. If Cullumber suddenly finds an opportunity to rent out the unused capacity of its factory for $81,800 per year, would your answer to part (a) change? . This is because the net income will by $ Click if you would like to Show Work for this question: Open Show Work

Answer 1

Answer is given below with all working

Make Vs Buy Evaluation Make Sails Buy Sails Net Income Increase /(Decrease) $91 $85 $27 -$255 -$52 Direct Material Direct Labor Variable Overhead Purchase price Total Unit cost $85 $271 $255 $255 $203 Cullumber should make the sails Note:- Fixed cost is sunk cost and not relevant for Make vs. Buy decision Fixed overhead Normal Capacity Fixed Cost per unit Total overhead cost Variable cost per unit $78,120 1,240 $63 $90 $271 Yes Answer will change This is because the net income will increase by $17,320 Buy Sails Differential Make Sails $112,840 $105,400 $33,480 $112,840 $105,400 $33,480 $316,200 -$64,480 $316,200 $316,200 $251,720 Direct Material Direct Labor Variable Overhead Purchase price Total Cost Less: Rent of unused capacity Net Cost Total unit cost $81,800 -$81,800 -$17,320 $251,720 $203.00 $234,400 $189.03