Question

View Policies Current Attempt in Progress Riggs Company purchases sails and produces sailboats. It currently produces 1,260 sailboats per year, operating at normal capacity, which is about 80% of full capacity. Riggs purchases sails at $254 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sall would be $95 for direct materials, S80 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 Riggs has come to you for advice. "It would cost me $265 to make the sails," she says, but only $254 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 es -45 or parentheses e.g. (45) Net Income Increase (Decrease) Make Sails Buy Sails Direct material $ Direct labor Variable overhead Purchase price Total unit cost

Answer 1

Total overhead = $ 90 per unit x normal production volume = 90 x 1,260 = $  113,400

Variable overhead = Total overhead - fixed overhead = 113,400 - 78,120 = $  35,280

Hence, variable overhead per unit =  35,280 / 1,260 = $ 28 / unit

Rest part of the answer is evident in the picture below: Net income increase (decrease) = Make sails - Buy sails

Make Sails Buy Sails Net Income Increase (Decrease) Direct material 95 95 Direct labor 80 80 Variable overhead 28 28 Purchase price 254 -254 Total unit cost 203 254 -51