Question

Blue Company purchases sails and produces sailboats. It currently produces 1,200 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Blue purchases sails at $267 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $99.02 for direct materials, $84.23 for direct labor, and $90 for overhead. The $90 overhead is based on $78,000 of annual fixed overhead that is allocated using normal capacity. The president of Blue has come to you for advice. “It would cost me $273.25 to make the sails,” she says, “but only $267 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).) Make Sails Buy Sails Net Income Increase (Decrease) Direct material $ $ $ Direct labor Variable overhead Purchase price Total unit cost $ $ $ Should Blue make or buy the sails? Blue should makebuy the sails.

If Blue suddenly finds an opportunity to rent out the unused capacity of its factory for $77,800 per year, would your answer to previous part change? YesNo . This is because the net income will decreaseincrease by $ .

Answer 1

	Make	Buy	Difference
Direct materials	99.02		99.02
Direct labor	84.23		84.23
Variable oh	25		25
Purchase price		267	-267
Total	208.25	267	58.75

Blue should make the sails

Yes. This is because the net income will increase by 7,300

.

(77,800 - (58.75*1200))